Investment Banking and Trading Are Booming. Are Bank Stocks Too Expensive?

The investment banking industry is rarely fairly valued, instead oscillating between under- and overvalued based on where we are in the business cycle. Today it appears to be firmly in overvalued territory, generating peak cycle returns that will be challenging to build off. Recent strong performance and swelling share prices have created a high-risk, low-return environment for long-term investors in investment banking and trading firms.

AI Buildout Contributes To Historically Strong Results

Investment banking and trading revenue grew 34% across our global coverage during the second quarter, clocking in at $280 billion on a trailing 12-month basis. Elevated volatility, high equity valuations, growing borrowing by institutional investors, strong CEO confidence, and demand for fundraising by artificial intelligence-exposed firms underpinned strength industrywide. Segment returns on equity were 22.4% in the US and 18.7% for European banks, compared with average figures of 15.7% and 12.8% over the past five years, respectively.

Investment banks have emerged as a distant beneficiary of the AI trade, benefiting from a surge in financing demand as cloud-service providers and frontier AI labs ramp up infrastructure investment.

The trends that underpin surging global trading revenue look near-term durable, if tenuous over the medium term: strong equity markets and higher prime brokerage borrowing by hedge funds, portfolio repositioning amid geopolitical and macroeconomic uncertainty, and strong loan demand from private credit borrowers. In investment banking, strategic corporate mergers and acquisitions look likely to persist amid a friendly regulatory backdrop, while equity and debt capital markets, fueled by AI investment, should finish 2026 well.

Expanding Multiples Mean Valuations Are Stretched

Strong returns have been driven in no small part by multiple expansion.

Today, US banks trade at 2.6 times tangible book value, while European banks trade at 1.35 times. Widespread expansion of multiples, on a revenue and profit base that already looks closer to peak cycle than normalized numbers, gives us pause.

Valuations now look stretched as the market applies those higher multiples to revenues and profits that appear to be approaching peak cycle levels. US banks trade at an 11% cap-weighted premium to our fair value estimates, and European banks now trade at a 6% premium as of Sept. 8, 2026.

We see selective opportunities in the space, but mostly for universal banks that derive a bigger chunk of net revenue from lending and other fee income lines. Pure-play investment banks look quite expensive at this stage.

Investment Banking Revenue Looks Likely to Peak in 2026 After Banner Years

We expect strong results to continue through 2027, but pencil in modest revenue declines for the US banks in 2027-28.

Investment banking, which is more cyclical, is likely to see weakness in 2028-29 as the corporate M&A boom plays out.

With segment margins flirting with record levels, returns on equity exceeding 2021 levels (a record year in the industry), and with many businesses set to generate all-time-high results in 2026, our medium-term outlook for the investment banking business is very soft.

Where Should Investors Look?

While investment opportunities are limited, we see possibilities in Bank of America BAC and Wells Fargo WFC. Both companies benefit from strong consumer franchises and a diversified business mix.

Bank of America

• Morningstar Rating: ★★★★
• Fair Value Estimate: $66
• Uncertainty Rating: Medium

As the holistic number two money-center bank in the US by nearly every metric, we believe Bank of America wields a wide moat in an industry that rewards scale and is consolidating. After the firm deployed excessive capital into long-duration securities at historically low yields during the coronavirus pandemic, we believe the primary dislocation between current market prices and our fair value estimate is time arbitrage, as the market is overweighting artificially depressed near-term earnings capability and underweighting the long-term upside.

Roughly one-sixth of Bank of America’s interest-earnings assets are currently locked up in long-duration Treasuries and mortgage-backed securities yielding blended rates of approximately 1.4% and 1.9%, respectively. With over half this portfolio maturing in the next five years and relative contribution shrinking as the broader balance sheet grows, Bank of America is currently awarded a multiple in line with inferior competitors, creating an attractive entry point for patient investors.

Wells Fargo

• Morningstar Rating: ★★★★
• Fair Value Estimate: $93
• Uncertainty Rating: Medium

Just over one year removed from the lifting of its unprecedented asset cap, Wells Fargo has reminded us of its strong deposit-gathering capabilities, growing average deposits by 10.1% from a year ago to fuel a loan book that has grown by 12.0% over that time frame, outpacing the bulk of peers.

Given the recency of regulatory overhang and stigma of cross-selling during the asset-cap era, we believe the firm is shoring up business lines that were most affected and trail larger peers—institutional trading, wealth management, and credit cards. The market sometimes fixates on declining net interest margins resulting from immense growth in trade financing. By contrast, we think that Wells Fargo is sharpening the tools needed to improve its holistic offering and continue regaining its lost deposit market share at a particularly opportune time, as the strong operating environment is enabling banks to currently generate hypernormal returns on capital.