Capital Markets Reawakening: Morgan Stanley and Jefferies Capture the IPO and Dealmaking Momentum

The investment banking sector is experiencing a pivotal shift as M&A and IPO activity accelerate into 2026. After years of subdued deal flow, both Morgan Stanley and Jefferies are well-positioned to capitalize on the reopening capital markets, though they approach this opportunity through fundamentally different business models. Morgan Stanley operates as a global powerhouse with diversified revenue streams, while Jefferies functions as an agile mid-market specialist. Understanding which firm offers superior upside requires examining how each adapts to the current market environment.

Morgan Stanley’s Path: Riding Multiple Waves Simultaneously

Morgan Stanley’s investment banking division has demonstrated remarkable recovery. Its IB fees surged 23% in 2025 after jumping 35% the prior year, marking a sharp turnaround from the 2022-2023 downturn. This rebound reflects more than just cyclical improvement—it signals structural strength. The company’s ability to monetize IPO market reopenings and cross-border M&A activity stems from its unmatched global reach and client relationships.

Beyond investment banking, Morgan Stanley’s trading operations have been stellar, benefiting from heightened market uncertainty tied to tariff volatility and macroeconomic concerns. As long as client activity remains elevated and volatility persists, this revenue engine will continue supporting overall profitability. The strategic partnership with Japan’s Mitsubishi UFJ Financial Group exemplifies how Morgan Stanley extends its influence beyond North America. In 2025, the companies deepened their 15-year alliance through operational integrations in their Japanese brokerage joint ventures, a move that propelled Asia region revenues up 23% year-over-year to $9.42 billion.

What truly distinguishes Morgan Stanley, however, is its transformation into a wealth and asset management juggernaut. These segments now account for nearly 54% of total net revenues (up dramatically from just 26% in 2010). As of year-end 2025, total client assets under management reached $9.3 trillion, inching closer to the long-held $10 trillion target. This diversification creates a powerful buffer—when dealmaking cycles cool, the recurring revenues from asset and wealth management provide steadiness.

Jefferies’ Strategy: Focused Positioning in Mid-Market Opportunities

Jefferies operates with a contrasting playbook, remaining fundamentally investment banking-centric while selectively expanding into lending and merchant banking ventures. The firm’s total IB fees climbed 10% in fiscal 2025 and 52% in fiscal 2024 after earlier declines. This growth trajectory, while solid, lags Morgan Stanley’s absolute fee generation, reflecting Jefferies’ positioning as a premier mid-market advisor rather than a bulge-bracket competitor.

Jefferies’ strength lies in serving companies that fall below the mega-cap threshold—firms navigating complex transactions where deep sector expertise and nimble decision-making matter more than global scale. The upcoming tariff environment and economic adjustments are already triggering advisory inquiries, and Jefferies’ pipeline suggests accelerating deal activity through 2026-2027.

A critical development is Jefferies’ deepening relationship with Sumitomo Mitsui Financial Group. As of November 2025, Sumitomo Mitsui held a 14.3% stake, with plans to increase it to 20% and launch a Japan-based joint venture by January 2027. This partnership mirrors Morgan Stanley’s MUFG strategy but carries distinct implications for Jefferies’ growth trajectory. The capital infusion and distribution network expansion could meaningfully enhance IB pipeline visibility in Asia-Pacific markets.

Jefferies’ asset management segment, generating roughly 10% of revenues, remains underdeveloped compared to Morgan Stanley. However, potential Fed rate cuts and continued monetary easing could spark increased investment activity, providing upside to this business line.

Performance Divergence: What the Markets Are Pricing In

The stock market has rendered a clear verdict on the two firms’ near-term prospects. Over the past 12 months, Morgan Stanley shares gained 31.8%, significantly outperforming Jefferies, which declined 20.4%. This performance gap extends beyond company-specific factors—Morgan Stanley has outperformed the broader investment banking sector, while Jefferies has lagged. Investor sentiment clearly favors Morgan Stanley’s strategic positioning.

Valuation multiples tell a different story, however. Jefferies trades at a forward 12-month P/E of 13.03X, whereas Morgan Stanley commands a higher multiple of 16.46X. This 26% valuation discount for Jefferies suggests market skepticism about the firm’s near-term profit growth, despite analyst optimism.

Return on equity provides another angle. Morgan Stanley’s ROE of 16.92% substantially exceeds both Jefferies’ 7.27% and the broader investment banking sector average of 12.54%. This metric underscores Morgan Stanley’s superior efficiency in deploying shareholder capital and generating returns—a reflection of its diversified revenue mix and operating leverage.

Analyzing the Growth Outlooks: Where Consensus Diverges

Analyst expectations reveal meaningful differences in how Wall Street perceives each firm’s trajectory. For Morgan Stanley, consensus revenue estimates project 6% growth in 2026 and 4.9% in 2027. Earnings are forecast to expand 8.4% and 7.1% for the same periods. These estimates have been modestly revised upward over recent days, suggesting growing confidence.

Jefferies presents a notably different picture. Consensus revenue estimates call for 16.5% growth in fiscal 2026 and 16.3% in fiscal 2027—more than double Morgan Stanley’s projected rates. Earnings are expected to jump 50.3% in fiscal 2026 and 38.1% in fiscal 2027. Yet these ambitious estimates have remained unchanged over the past week, indicating consensus views are crystallized rather than shifting.

The growth differential reflects two competing narratives. Morgan Stanley’s slower revenue trajectory reflects the reality that its diversified business generates meaningful income regardless of IB cycles, limiting explosive upside. Jefferies’ higher growth potential stems from its concentrated exposure to advisory and capital markets—when these businesses inflect higher, earnings leverage amplifies returns. The flip side: concentrated business models carry elevated downside risk during downturns.

The Strategic Verdict: Quality Versus Opportunity

Choosing between these firms requires clarifying investment objectives. Morgan Stanley embodies institutional-quality characteristics: proven management, geographically diversified operations, multiple revenue levers, and demonstrated pricing power. The partnership with MUFG, combined with the expanding wealth management platform, creates competitive moats that should sustain returns through various market environments. The higher valuation multiple reflects this quality premium.

Jefferies represents a more opportunistic positioning. The mid-market advisory franchise should benefit substantially from expanded IPO activity, increased M&A volume among mid-cap companies, and the Sumitomo Mitsui partnership. Jefferies’ lower valuation leaves room for multiple expansion if the firm executes against its ambitious growth targets. However, this scenario depends on sustained deal momentum and economic clarity.

For risk-averse investors prioritizing stability and consistent capital returns, Morgan Stanley’s diversified platform justifies paying the premium multiple. For investors with higher risk tolerance seeking leverage to capital markets recovery, Jefferies offers compelling upside at a discount valuation—provided near-term macro conditions remain supportive.

Currently, Morgan Stanley carries a Zacks Rank #1 (Strong Buy) designation, while Jefferies holds a Zacks Rank #3 (Hold), reflecting these strategic considerations and near-term probability-weighted outcomes.