Is Morgan Stanley Still a Buy Despite Recent Strong Gains? A Deep Dive into Valuation Models and Strategic Shifts

Morgan Stanley (MS) has delivered a stellar performance in 2025, with third-quarter earnings per share (EPS) of $2.80, far exceeding the Zacks Consensus Estimate of $2.08. The firm's trailing twelve months (TTM) EPS of $9.76 and a 18% year-over-year revenue surge to $18.2 billion have fueled a stock price rally, closing at $165.43 on November 26, 2025. Yet, as the stock trades at a price-to-earnings (P/E) ratio of approximately 17 (calculated using TTM EPS), investors must ask: Is Morgan Stanley still a compelling buy, or has the market already priced in its transformation?

Contrasting Valuation Models: DCF vs. Relative Metrics

A discounted cash flow (DCF) analysis suggests optimism. Morgan Stanley's 18.0% return on average common equity (ROE) and 25.3% net profit margin-well above the industry average of 21.9% for money center banks based on financial health analysis-underscore its capital efficiency. Assuming a conservative 10% perpetual growth rate for free cash flows supported by its 18% revenue growth in Q3 2025, the DCF model implies an intrinsic value significantly above the current stock price. This aligns with the firm's aggressive share repurchases $1.1 billion in Q3 2025 and strategic reinvestment in high-margin segments like wealth management, which now accounts for 45% of total revenue as reported in investment news.

However, relative valuation metrics tell a different story. At a P/E of 17, Morgan Stanley trades at a discount to its five-year average of 22 (based on historical data) and peers like Goldman Sachs, which trades at a P/E of 20. This gap suggests the market may still be underappreciating its transformation. Yet, the firm's focus on AI and digital assets-a strategic pillar highlighted in its Q3 earnings call-could justify a premium if these initiatives drive secular growth.

Strategic Transformation: From Capital Markets to AI-Driven Ecosystem

Morgan Stanley's business model is evolving from a traditional capital markets-centric approach to a diversified ecosystem. The wealth management segment, now a revenue powerhouse with $8.9 trillion in client assets according to investment reports, reflects its pivot toward fee-based, recurring revenue streams. CEO Ted Tick's assertion that "the capital markets flywheel is taking hold" as stated in earnings transcripts signals a shift toward leveraging momentum in investment banking up 44% year-over-year to fund innovation.

The firm's AI and digital asset initiatives are equally pivotal. Sharon, the CFO, emphasized AI's "growing potential" during the Q3 earnings call as noted in financial commentary, a sentiment echoed in its 2025 investment strategy, which positions AI as a catalyst for operational efficiency and client offerings. This aligns with broader economic themes, such as resilient supply chains and geopolitical fragmentation as discussed in Morgan Stanley's insights, where digital tools can mitigate risks.

Risks and Market Dynamics

Despite these strengths, risks loom. Morgan Stanley's 2025 outlook warns of U.S. policy uncertainty, including potential deregulation and tariffs, which could dampen growth in late 2025 and 2026 according to global investment strategy reports. Additionally, extreme valuations in U.S. equities and AI-driven stocks-driven by "U.S. exceptionalism" as identified in investment analysis-pose a reversal risk. If momentum shifts, the firm's overweight position in equities particularly in U.S. and Japanese markets could face headwinds.

Conclusion: A Buy with Caution

Morgan Stanley's financials and strategic initiatives justify its recent gains, but the stock remains attractively valued relative to historical and peer benchmarks. The DCF model implies upside potential, while the firm's AI and wealth management bets position it for secular growth. However, investors must weigh these positives against macroeconomic risks, particularly in the U.S. For those with a medium-term horizon and risk tolerance, Morgan Stanley still offers compelling value-but not without vigilance.