Investment Banks Beneath the Surface: Capturing the Winners and Fading the Fakes

A market neutral way to play the investment banks

Great morning friends.

The vibes they are a changing. I can’t explain it but it feels like the media now has shifted from “everything’s over” to “high uncertainty”. Tariffs are still the talk of the town, but the frequency and magnitude of talks on it are dying down.

Surprising to no one, when tariffs were all over the news cycle searches on Google for “stock market” were flying. But notice what’s happened below? As those have chilled out, so too has the broader stock market volatility. As the news cycle fades, so does the volatility. For now at least.

I’m currently still positioned for uncertainty and volatility (diversified globally, high percentage of cash, etc.) and am outperforming YTD. Remember I am not your guru, or your furu. I do different things than most and even though I invest in financials as a core competency, I do other things (China, Energy, Pharma, LatAm, etc). I also reserve my right to change my mind all the time. All to say I am not going full cyclical reflation mode just yet. There’s still too much uncertainty, and with us laregly below the 200DMA and with the “sell the rips” crew largely in control it means you should be prudent.

But all to say, I think we’re closer to resolution than farther away. If you pinned me to it, I think my “base case” is a shallow/temporary recession that quickly resolves itself. I think certain sectors & industries get hit worse than others and rotations happen, but there isn’t a GFC type event looming. The vibes, are in fact changing.

The Investment Banks

As the image let’s on, they’re all a bit underwater right now. At least on a YTD basis.

And those of you that have been around for a while know that we made money shorting Evercore and Piper Sandler last winter and early this year. The numbers were soft, the backlogs were shrinking, and optimism was disconnected from the scoreboard. That trade worked. Peak to trough-ish drawdowns were 35% to 40% depending on the name. This is and was vibes at it’s purest.

The set up was, huge runs upwards in multiples (industry vibes) and deteriorating actual deal flow pull through (Trump volatility pausing activity) both at the same time. So you didn’t even really need them to post bad results, you literally just needed the market to see that the boom boom times were on pause.

But … the game has changed. And when the data shifts, you shift with it. That’s not style drift. That’s just being intelligent.

Earnings overall for the sector has not been terrible at all. In fact there was some deal pull forward, which is to be expected. But there hasn’t been enough time for this to truly get bombed out as a sector. M&A has slowed, not stopped.

And so when I read through Goldman’s latest M&A activity report it showed something simple: the advisory world is splitting in two. Some firms are winning mandates again. Some are quietly fading. Backlogs are no longer filled. Deal momentum is uneven. And if you know where to look, the edge is starting to form.

I’m not going directional on the whole sector. I’m not trying to guess whether M&A volumes will be up 20 percent next quarter. What I am attempting to do is run a clean, balanced, market-neutral book that goes long the winners and short the ones still living off inertia. At least in theory …

My framework is built on three simple pillars:

1. Where earnings and valuation stand today

2. Who’s winning actual mandates and building backlog

3. What could make things all go wrong

Below are 4 names I’m leaning long and 4 I’m leaning short. Some “where does this go wrong” analysis and then a handful of factors to look out for. If you’re looking for pairs in the investment banking space, looking to learn who is performing behind the scenes, or just want to learn the space, then read on.