Morgan Stanley Downgrades Goldman Sachs Due to Rising Recession Risks

Goldman Sachs may face headwinds due to growing concerns about tariffs and the impact they could have on capital markets, according to a recent note from Morgan Stanley. The investment bank, which is heavily reliant on dealmaking and trading activity, could see its revenues pressured if the economy slows and market conditions worsen.

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Morgan Stanley analyst Betsy Graseck downgraded Goldman Sachs from an “overweight” rating to “equal weight,” signaling a more cautious stance on the stock. She also revised her price target downward from $659 to $558. While this new target still suggests a potential 19% upside from current levels, it reflects a more guarded outlook for the firm given today’s economic and geopolitical backdrop.

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Graseck pointed out that Goldman Sachs is the most exposed among large-cap banks when it comes to investment banking revenues. This area of the business is typically more sensitive to economic downturns than other parts of the financial sector, such as loan growth at traditional commercial banks.

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According to her research, more than 60% of Goldman Sachs' revenue comes from its Global Banking and Markets division—areas that are typically the first to react to recession risks and market volatility.

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She wrote that investment banking revenues can be quick to decline in uncertain times, particularly when macroeconomic pressures increase or capital markets activity slows down. This kind of environment is what Goldman may be facing now, especially with renewed fears of a recession tied to rising global trade tensions and the return of aggressive tariff policies.

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These concerns have been amplified by recent policy moves from former President Donald Trump, who is campaigning on imposing steep tariffs on imports from other countries if elected for a second term. Investors had originally expected that a potential Trump victory could ignite a wave of merger activity and corporate dealmaking, which would benefit firms like Goldman Sachs.

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However, the announcement of harsher trade measures has dampened those expectations and introduced fresh economic uncertainty.

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Graseck noted that if the economy slows as a result of these tariffs, the hoped-for surge in capital markets activity may not materialize. This would be particularly challenging for Goldman, which depends more heavily than its peers on investment banking and trading revenues to drive performance.

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Another area of concern highlighted in Morgan Stanley’s downgrade was Goldman’s exposure to consumer credit through its Apple Card business. According to Graseck, around 36% of Goldman’s credit card portfolio is held by consumers with FICO scores under 660—a threshold that signals subprime or near-prime borrowers. If recessionary pressures mount, this segment of the loan book could come under strain, potentially leading to increased defaults or lower valuations for that portfolio.

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This added consumer credit risk only compounds the vulnerability Goldman faces in a slowing economy. Combined with the potential hit to investment banking revenue, it creates a double whammy that investors should not ignore.

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Following the release of Graseck’s report, Goldman Sachs shares fell over 3% in premarket trading. The decline adds to an already challenging year for the stock, which has dropped more than 17% since the start of 2025. Investors appear to be digesting not just the downgrade itself, but also the larger implications of how macroeconomic forces, policy decisions, and market sentiment could weigh on the bank’s future earnings.

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The downgrade underscores how quickly the outlook for financial institutions can shift amid a changing economic environment. While Goldman has long been seen as a powerhouse in the banking world—with a strong reputation in M&A advisory, capital markets, and trading—its dependence on these cyclical areas leaves it more vulnerable when conditions become uncertain.

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Graseck’s move also reflects a broader trend among analysts who are reevaluating their positions on banks with significant investment banking exposure. As recession risks grow and the likelihood of further trade disruptions increases, investors may prefer to rotate into names with more stable and diversified revenue streams.

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In summary, while Goldman Sachs remains a top-tier financial institution, its current exposure to capital markets volatility and subprime credit could pose challenges in the months ahead. Morgan Stanley’s downgrade is a signal to investors to be cautious, especially in an economic environment that may be shifting from one of optimism to one of heightened risk.

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