Wall Street chiefs are finally calling the bottom on the dealmaking drought that has plagued their earnings for the past two years.

Executives at the biggest banks are expecting a pickup in the coming months, tied to the Federal Reserve’s apparent pivot away from two years of interest-rate hikes. As they wrapped up the worst year for investment-banking revenue since 2012, Wall Street’s top brass outlined their expectations for a turnaround — at least at some point.

“I’m pretty optimistic,” Goldman Sachs Group Inc. Chief Executive Officer David Solomon said on a conference call discussing earnings Tuesday. “I’m not going to say it’s running back to 10-year averages right away, but it has materially improved. I do think you’re going to see some more meaningful IPOs in 2024, and we are, just across debt and equity issuance, see more activity, more engagement.”

As geopolitical tensions and interest rate hikes kept rising throughout last year, bank executives acknowledged the thankless task of trying to predict a rebound in mergers and acquisitions activity after a prolonged slump that had already contributed to major layoffs at both Goldman and Morgan Stanley. 

But as they wrapped up big banks’ fourth-quarter earnings on Tuesday, the two Wall Street giants struck a note of optimism on what’s ahead. Goldman’s deal pipeline “saw really strong replenishment and improvement in the fourth quarter” while strategic dialogues also increased, Solomon said. Morgan Stanley CFO Sharon Yeshaya cited the increasingly positive tone from its retail and institutional clients. The bank, which just installed its new CEO in Ted Pick, reported US$702 million in fees from advising on deals, surpassing estimates of $535 million.

In the meantime, both firms touted their asset- and wealth-management results, which they’ve prioritized in recent years to smooth out the boom-and-bust of their Wall Street operations. Particularly so at Goldman Sachs, which is in the midst of a critical effort to fire up its near $3 trillion division after a period of internal tumult and a failed consumer foray.

Such volatile cycles were on full display over the past few years. In 2021, low rates and pandemic-era stimulus fueled a dealmaking windfall, prompting a hiring frenzy and bumper bonuses. That ended with the Fed’s easy-money era in early 2022, with investment-banking revenue falling precipitously: at the five biggest Wall Street banks, such earnings last year were less than half of what they were in 2021. 

Now, though, there are signs of a pickup, with the markets expecting six Fed cuts this year. 

“We are encouraged by signs that CEO and boardroom optimism is growing, evidenced by the build of our advisory and IPO pipelines,” Morgan Stanley’s Yeshaya said Tuesday. “Strength and sentiment should support broad M&A and new capital market issuance, and eventually feed through to the broader market activity.”

As always on Wall Street, the optimism comes with a caveat that uncertainties linger, potentially altering expectations. Fresh uncertainty stemming from the war between Israel and Hamas could well temper any optimism. And as slowing inflation ramped up bets for aggressive Fed easing this year, a growing number of investors and analysts say the market is pricing too many interest-rate cuts from the world’s major central banks.

‘There’s a lot going on in the world,” Goldman CEO Solomon said. “The trajectory of rates — there’s a point of view on rates and inflation — but it’s certainly not certain to me.”