Jefferies' Q2 Earnings Signal a Split Road for Investment Banks: Advisory Strength vs. Underwriting Weakness

Jefferies' Q2 2025 earnings report reveals a stark dichotomy in the investment banking landscape: advisory services thrived amid robust M&A activity, while underwriting revenues stumbled under the weight of macroeconomic uncertainty and volatile equity markets. This divergence underscores both the resilience of strategic dealmaking and the fragility of capital markets—making Jefferies a bellwether for the broader industry. For investors, the results highlight a critical wait-and-see moment, where policy clarity and market stability could tip the scales toward recovery.

The Advisory Boom: A Sign of M&A Resilience
Jefferies' advisory revenue surged 61% year-on-year to $457.86 million in Q2, driven by cross-sector M&A activity and market share gains. This growth mirrors a sector-wide trend of companies using acquisitions to navigate economic uncertainty—whether through consolidation, geographic expansion, or vertical integration. The year-to-date advisory revenue of $855.64 million, up 37% from 2024, suggests that corporate strategists remain confident in dealmaking, even as broader markets falter.

This resilience is notable because advisory fees are less dependent on immediate market conditions compared to underwriting. Executives appear willing to proceed with mergers and partnerships, betting on long-term value over short-term volatility. For Jefferies, this bodes well for its advisory franchise, which now accounts for 60% of its investment banking revenue—a clear strategic advantage.

Underwriting's Downward Spiral: Macro Risks and Policy Fog
The underwriting side of Jefferies' business tells a different story. Total underwriting revenue fell 34% year-on-year to $328.69 million in Q2, with equity underwriting plummeting 51% to $122.37 million. This collapse reflects investor caution in the face of U.S. policy uncertainty and geopolitical tensions, which stalled equity offerings and IPOs during the quarter's first two months. Debt underwriting, though flat year-on-year, provided modest support, buoyed by corporate refinancing needs.

The YTD figures paint an equally grim picture: underwriting revenue dropped 34% to $656.06 million, with equity underwriting down 45%. These declines are not unique to Jefferies—other bulge-bracket banks have reported similar underwriting slumps—but the mid-tier firm's exposure to equity markets amplifies its vulnerability.

The S&P 500's 5% decline in Q2 2025 versus a 1% rise in 2024 underscores equity market weakness.

Policy Clarity as the Catalyst for Recovery
Jefferies management points to improved investor sentiment in May—after U.S. policy concerns eased—as a turning point. This hints at the critical role of macro stability for underwriting recovery. If policymakers resolve issues like debt ceiling negotiations, trade disputes, or regulatory overhang, capital markets could rebound, lifting underwriting fees. Conversely, further delays or escalation of these risks could prolong the slump.

The firm's strong backlog and client discussions suggest optimism about H2 2025. However, this hinges on two variables: equity market normalization and policy resolution. Investors should monitor Jefferies' Q3 guidance closely for clues about whether deal pipelines are converting into revenue.

Investment Thesis: A Wait-and-See Stance
Jefferies' results are a canary in the coal mine for investment banks. The advisory strength signals that M&A activity remains a viable growth lever, but underwriting's fragility underscores systemic risks tied to macroeconomic and geopolitical factors.

For investors, the path forward is cautious:
1. Hold a small position: Jefferies' advisory resilience and cost discipline (adjusted tangible equity return of 5.5% still outperforms peers in bad markets) justify a modest stake.
2. Wait for Q3 clarity: If underwriting shows signs of stabilization and equity markets rebound, the stock could outperform.
3. Watch policy indicators: U.S. fiscal and regulatory developments will be critical. A resolution of the policy fog would reduce underwriting headwinds.

Avoid overcommitting until these catalysts materialize. The firm's valuation—trading at 1.2x tangible book value, below its five-year average—offers some margin of safety, but macro risks remain.

Final Take
Jefferies' Q2 results are a reminder that investment banks are dual-track businesses: advisory revenues reflect corporate strategy, while underwriting is hostage to market conditions. For now, the latter remains the weak link. Investors should treat Jefferies as a proxy for broader banking health and use its performance to gauge whether capital markets are ready to rebound. Until then, patience—and a small bet—wins the day.