Oppenheimer Downgrades Major Banks as Valuations Appear Overvalued Ahead of Q2 Results

Key Points

• Analysts at Oppenheimer believe large bank valuations are now priced correctly.

• This means any surprises in the upcoming second-quarter earnings could lead to underperformance in the stocks.

• In particular, Oppenheimer believes some of the more pure-play investment banks could be at risk.

Next week, the big banks will officially kick off second-quarter earnings season, as investors brace for a wave of fresh financial reports. Banks are typically a good place for investors across sectors to begin evaluating the environment because they have broad exposure to nearly every segment and industry in the economy, allowing them to provide a unique pulse check.

Interestingly, analysts at Oppenheimer recently downgraded the large-cap bank group, suggesting those banks are priced for perfection. Here’s the bear case.

Image source: Getty Images.

Limited room for upside

At the very end of June, analysts at Oppenheimer downgraded the major investment banks, Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS)from a perform rating to an underperform rating, suggesting that current valuations are flush.

Oppenheimer also lowered its rating on Citigroup (NYSE: C) and Bank of America (NYSE: BAC) from outperform to perform.

“While the cycle may well go on for another 12-18 months or more, we’d rather not wait around for the warning signs to appear, and thus, particularly in the case of the investment banks, we are more inclined to take the money and run,” the Oppenheimer analysts said in their research note.

Data by YCharts.

As you can see above, the more pure-play investment banks, such as Morgan Stanley and Goldman Sachs, have outperformed the group this year.

One big reason is Space Exploration Technologies’ initial public offering (IPO), which nearly every investment bank got a piece of and which generated substantial fees after SpaceX successfully raised nearly $86 billion.

Investors have been excited and hopeful about renewed capital markets activity, particularly on the IPO front, that could take these businesses to new levels. While the year got off to a good start, the Iran war has somewhat dampened expectations about broader IPO activity because bond yields have increased.

There was also hope that SpaceX could trigger a wave of new artificial intelligence IPOs, including OpenAI and Anthropic, although OpenAI may delay its IPO, according to various media reports.

In the first quarter of 2026, investment banking revenues at Morgan Stanley and Goldman Sachs jumped 36% and 48%, respectively, year over year. Meanwhile, bank valuations have gotten pretty high, relative to where they’ve been over the past five years.

Data by YCharts.

So, if investment banking activity dries up due to higher bond yields or concerns about AI, prompting OpenAI and even Anthropic to delay their IPOs, investment banks may see a near-term rerating. Investors could also become concerned about credit conditions, particularly if the Federal Reserve raises interest rates, which would put more financial strain on businesses and consumers.

How to think about the banks

The Oppenheimer analyst recommended rotating out of large banks and into other areas of the sector with greater upside right now, such as super-regional banks like U.S. Bancorp and PNC Financial Services Groupwhich have greater expansion potential. The analyst also recommended alternative asset managers, such as Ares Management and KKRwhich have been hammered by private credit concerns.

Ultimately, long-term investors should avoid trading around earnings reports and can certainly hold stocks even if they are highly valued, as long as the long-term thesis remains intact.

The Oppenheimer analysis certainly raises some good points, and large banks have really outperformed since the Silicon Valley Bank debacle in 2023, as stakeholders have viewed them as a flight-to-safety play. I do think there is better value elsewhere in the banking and financial services sector.

However, investors don’t need to make radical changes to their bank holdings if they don’t want to, as I still think this group is relatively well positioned for the long term.

Understanding that the upcoming earnings reports may not be a catalyst right now will help investors have a better framework of the sector and, therefore, make more logical investment decisions.

*Stock Advisor returns as of July 9, 2026.

Citigroup is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, KKR, and U.S. Bancorp. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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