The M&A market in the United States is expected to recover this year, and these investment bank stocks are expected to soar.

According to the recent two analysis reports, due to the resilience of the U.S. economy and the expectation of a rate cut by the Federal Reserve later this year, the mergers and acquisitions capital market is expected to take off in 2024. CFRA analyst Michael Elliott specifically pointed out that many investment banks were aggressively recruiting senior staff last year, "indicating that there is an internal expectation for the economy to recover quickly." Before these optimistic indicators appeared, there was a "drought" in M&A activity, which in turn suppressed the demand for stock and bond issuances. According to Refinitiv's data, 2023 was a difficult year for investment banks as global M&A activity fell by 17%, the lowest level in 10 years. Although equity capital markets (ECM) and debt capital markets (DCM) saw modest growth of 7% and 6% respectively, considering the lackluster performance in 2022, these returns are still low. Morgan Stanley also expects a rebound in M&A activity. The company's strategists and analysts, led by Andrew Sheets, wrote, "Our financial sector equity analysts expect global M&A volume to increase by 50% compared to 2023 as leading indicators turn green, banks indicate that the deal pipeline is building, and adverse factors affecting corporate confidence are easing. Morgan Stanley's research team states that Europe and North America are expected to experience the "most positive activity tilt" regionally; however, Australia, India, South Korea, and ASEAN also have favorable conditions. In Japan, a broader shift towards efficiency by companies should drive M&A activity. By industry, strategists and analysts expect that M&A activity in the healthcare, real estate, consumer goods, and technology sectors will revive. Elliott of CFRA notes that M&A activity has begun to heat up. He said that activity in January 2024 increased by 15% year-on-year, "continuing strong economic and stock market performance is likely to ignite enthusiasm, drive deal closures and capital issuances; looking ahead to 2024, we anticipate that the improvement in the first half of 2024 will be modest, and then accelerate in the second half." This outlook is driven by two factors: (1) investment banking transactions take time, usually 6 to 9 months, or even longer; (2) rate cuts are expected to commence in mid-2024. Elliott predicts that companies with a high concentration of investment banking business are best positioned to handle the increase in M&A activity. He stated that Evercore (EVR.US), Jefferies (JEF.US), and Lazard (LAZ.US) had investment banking revenue accounting for over 50% in 2023. Meanwhile, Raymond James Financial (RJF.US) and Stifel Financial (SF.US) had investment banking revenue accounting for less than 17% of their total revenue. Currently, the average P/E ratio of these five companies is 13.3 times, with an expected P/E ratio of 10.7 times, while the 10-year average expected P/E ratio for the investment banking and brokerage industry is 12.6 times. Elliott points out that based on expectations for 2025, this implies a 15% discount, meaning that "investors may not have fully realized the potential for profit growth in 2025." Furthermore, he notes that the P/E ratios of these five companies have historically been higher than the industry average, providing a larger discount. For example, Evercore's 10-year average P/E ratio is 14.4 times, Jefferies' 10-year average P/E ratio is 14.2 times, and Lazard's 10-year average P/E ratio is 14.6 times.