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Morgan Stanley (NYSE:MS) stock slid as much as 2.3% and Goldman Sachs (NYSE:GS) stock fell as much as 2.2% after Odeon Capital analyst Dick Bove downgrades both banks to Hold from Buy on the basis that Federal Reserve Chair Jerome Powell indicated the central bank will start shrinking its balance sheet this year.
That will make it unlikely that Goldman (GS) and Morgan Stanley (MS) will achieve 2022 earnings consensus estimates, as the markets they serve are likely to "contract meaningfully."
"It is expected that the nature of the financial markets will adjust in 2022," Bove wrote in a note to clients. Rather than a plentiful supply of low-cost funds, there is likely to be a shortage of funds to support the financial sector as it now exists. Moreover, the cost of this money could be meaningfully higher."
The analyst contends that loans will replace debt offerings. That warrants a shift to banks and away from capital market and non-bank financial companies, he said.
Goldman (GS) and Morgan Stanley saw profits jump to record levels as the Fed increased its balance sheet by $4.6T during 2020 and 2021, the analyst reasoned.
He argues that investors should be looking at money supply, not so much interest rates. "It was not interest rates that created this surge in activity and profit, it was money – money created by the Federal Reserve due to the expansion of its balance sheet" he said.
Earlier, Goldman cut Financials to Neutral due to its recent overperformance vs. the S&P 500 and the prospect of slower economic activity.