Morgan Stanley Downgrades Banks, Says Tariffs Increase Recession Risk

Analysts at Morgan Stanley on Monday cut their outlook on large- and mid-capitalization banks to “in-line” from “attractive,” writing that President Donald Trump’s tariffs are increasing recession risks.

In their note on large-cap banks, Morgan Stanley analysts led by Betsy Graseck wrote that while their base case is for a “significant” gross domestic product (GDP) slowdown, recession risks have surged. The slower GDP growth, coupled with increasing economic uncertainty, is set to “push out the nascent capital markets rebound, incrementally slow loan growth, and drive net charge offs across consumer and commercial loans,” they wrote. 

They said that American consumers, who drive U.S. GDP growth, “do not have  savings levels to absorb these tariffs and continue spending at pre-tariff levels.”

Analysts Downgrade Goldman, Upgrade Bank of America

The analysts also downgraded Goldman Sachs (GS) to “equal-weight” from “overweight,” saying the Wall Street powerhouse is the most exposed to investment banking revenue, which is more vulnerable “to recession risk and deteriorating market conditions” than that of traditional commercial banks. They upgraded Bank of America (BAC) to “overweight” from “equal-weight,” citing cheap valuations.

Shares of Goldman Sachs slipped nearly 1% intraday, while those of Bank of America are up 2.7%.

Meanwhile, Morgan Stanley analysts led by Manan Gosalia downgraded midcap banks, “as higher and faster than expected tariffs raise recession risks, weigh on loan growth and in-turn, forward EPS and multiples.”