Morgan Stanley has tech to thank for what could boost a long-dormant part of its business

Published Mon, Jul 17 20235:47 PM EDT

Morgan Stanley (MS) is set to report quarterly earnings before the opening bell Tuesday. Investment banking is a line item in focus — not for what it can deliver in the near term but, instead, for what it could possibly provide from down the road. Developments in tech recently look like they could set the table for a thawing of the deep freeze in mergers and acquisitions as well as initial public offerings. There's been a lag in Morgan Stanley's investment banking business for the past several quarters as M & A activity and IPOs have slowed on the back of macroeconomic uncertainty. That slowdown has caused companies to pull back on dealmaking in order to both reserve capital and get regulatory clarity. While working on a transition to depend more on wealth management, investment banking is still an important aspect of Morgan Stanley's overall business. For context, global M & A value declined by 44% in the first five months of 2023, according to analytics firm GlobalData . And, JPMorgan research analysts, in a recent note , reduced their earnings per share (EPS) estimates for Morgan Stanley due to "lower [investment bank] revenues with limited cost offset." This goes for IB across the board, with staff reductions that have hit banking giants like Goldman Sachs (GS). Jim Cramer, however, believes that mergers are poised to make a comeback. In his Sunday column , Jim cited last week's stunning defeat for Federal Trade Commission Chair Lina Khan in her efforts to block Club name Microsoft (MSFT) from buying videogame maker Activision Blizzard . Khan's anti-M & A feelings have sent a chill through Wall Street. Top regulators have issued concerns over the nearly $69 billion deal since it was announced last year, citing the potential to stifle competition in the gaming sector. Both companies want to close their deal by July 18. On the IPO front, while not tech, Mediterranean restaurant chain Cava 's successful offering last month has boosted hopes that more companies will decide to come public. Morgan Stanley had a hand in the Cava IPO as a book-runner. According to Renaissance Capital , 54 offerings including Cava were priced in 2023, nearly 30% more than last year, and roughly half of those that filed for this year. Total IPO proceeds so far of $9.3 billion were more than double 2022. Often times with IPOs, as is the case in the offerings ahead, tech tends to dominate. Companies planning to go public this year: Semiconductor giant ARM Holdings, chat service Discord, Instacart and Reddit. If indeed there are more merger deals and IPOs to come, it would stand to reason that Morgan Stanley could win some of the advisory business underwriting business for its investment banking unit. That would be great news long term as the banking industry possibly faces more regulatory rules after the March failure of Silicon Valley Bank and the subsequent collapse of a few others. New rules could require banks to hold as much as 20% more capital. These reports come even as all 23 banks stress tested by the Federal Reserve passed. Following the latest stress tests, Morgan Stanley said it will increase its quarterly common stock dividend to 85 cents a share from 77.5 cents a share, along with reauthorizing a multiyear share repurchase program of up to $20 billion. Our other bank stock, Wells Fargo (WFC), which reported solid earnings last week, announced that it will raise its dividend to 35 cents a share from 30 cents a share. At the Club, we love capital returns to shareholders. It pays us to be patient with the stocks of Morgan Stanley and Wells Fargo, which have been underperformers year-to-date compared to the S & P 500 . Bottom line There will likely be a pick-up in the M & A landscape if Microsoft's landmark acquisition of Activision is completed, leaving dealmakers increasingly emboldened. Morgan Stanley will likely benefit as companies turn to its investment banking services for ambitious deals. We will be looking to see what the bank's management has to say about its investment banking during second-quarter earnings on Tuesday. As U.S. stocks trend higher — with the Nasdaq up 36% year-to-date — the VIX nearing historic lows and inflation showing signs of cooling, this could nurture a better environment for companies to list on public markets. "So, put it all together and a more robust M & A market and a better IPO market — you heard it here first — will take up the slack of the banks and put down the monotony of endless price target boosts from sycophantic analysts," Jim wrote in his column. "At last they will be busy with new issuance." While banks generally do better in higher interest rate environments, there's also been recent concern that the Federal Reserve might go too far in its rate hikes to battle inflation and tip the economy into a recession. Time will tell on that score. A rate increase looks like a lock at the Fed's policy meeting next week, which would be a resumption of hikes after a June pause. The jury is still out on whether there's a second rate-raise in the cards before year-end. But the idea that the Fed is in the final few innings of its unprecedented tightening cycle may be the clarity that was needed to reignite capital markets activity. (Jim Cramer's Charitable Trust is long MS, MSFT, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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