An analyst upgraded Morgan Stanley to a buy. Why we're not ready to follow suit

Newfound optimism on Morgan Stanley helped its stock close Friday's session at its highest level of the year. Jim Cramer is still unsure what the Club's next move should be. Morgan Stanley's persistent underperformance has made the stock one of our thornier positions — so much so that Jim has openly considered dumping it for investment banking rival Goldman Sachs . Dealmaking activity has picked up, but it's not been enough to fully unlock Morgan Stanley shares. That is in large part because the bank's wealth management division has failed to impress. Analysts at HSBC see better days ahead for Morgan Stanley and in a note to clients late Thursday upgraded the stock to a buy rating from hold, arguing its "long period of underperformance could be ending." Among the reasons for the call: A healthy market backdrop should support the financial performance of both its investment banking and wealth management operations, analysts said. They added that negative sentiment around the stock more generally also seems to have bottomed. Shares of Morgan Stanley rose more than 3% Friday, to $107.88 each, helped by both HSBC's upgrade and better-than-expected jobs data , which lifted the entire banking sector higher, including fellow portfolio name Wells Fargo . Morgan Stanley ended Friday within a dollar of its all-time closing high of $108.73 reached back in February 2022. Still, the stock is up only 15.7% year to date and 36.4% over the past 12 months, lagging behind the KBW Bank Index , which has climbed 19.4% and 52.6%, respectively, over those timeframes. For its part, Goldman Sachs has jumped 28.4% so far in 2024 and 60.5% in the past year. Friday's positive developments are welcome news – but not enough to add clarity on our path forward for Morgan Stanley. We're maintaining our hold-equivalent 2 rating on the stock. "Candidly, I think that [Morgan Stanley] is not priced for a good IPO market and [Goldman Sachs] is," Jim said Friday. "The reason for that is because I think that people believe the wealth advisory business isn't doing as well as it can be and the E-Trade buy seems to not be working out," Jim said, referring to Morgan Stanley's $13 billion acquisition of the brokerage firm in 2020. "We still do not have answers for that so I can't say that we are going to upgrade." However, there's hope Morgan Stanley's stock can climb higher if its sizable investment banking business continues its recovery. In order for that to happen, there must be a more meaningful resurgence in initial public offerings (IPO) and mergers and acquisitions (M & A) after more than two downbeat years for both dealmaking markets. Banks like Morgan Stanley and Goldman Sachs have long relied on fee-based revenues from deals. The more activity there is, the more fees available for them to collect. The nascent rebound has already showed up in Morgan Stanley's results. In the second quarter, revenue for the firm's investment banking segment surged 51% year over year. Meanwhile, advisory and equity underwriting fees both increased 30% and 56%, respectively, over the same period. The environment for deals is not back to normal just yet, though. During an industry conference in September, Morgan Stanley co-president Dan Simkowitz said that M & A and IPOs will likely remain below trend through year-end. To be sure, the executive also forecasted that this activity would accelerate in 2025 as the Federal Reserve's interest rate-cutting efforts ripple through the economy. Morgan Stanley's wealth management franchise — a major growth priority for the bank — is a lingering concern after a miss on revenues last quarter, which caused the stock to briefly sink. Meanwhile, Goldman Sachs beat analysts' expectations for revenues in wealth. Morgan Stanley's quarterly results on Oct. 17 will provide an important look at whether this challenged part of its business is showing any reason for optimism. For the time being, the Club is taking a wait-and-see approach with Morgan Stanley stock. If there is a surge in IPO and M & A activity that HSBC forecasted, Morgan Stanley is well-positioned to benefit. "If we get deals, [Morgan Stanley] will be a good place to be," Jim said. (Jim Cramer's Charitable Trust is long MS, 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. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Newfound optimism on Morgan Stanley helped its stock close Friday's session at its highest level of the year. Jim Cramer is still unsure what the Club's next move should be.