Wells Fargo Earns Bold Upgrade Ahead of Earnings; Stock Poised to Close Gap

Morgan Stanley has issued a bold upgrade for Wells Fargo just over a week before the bank’s earnings report next Tuesday. The firm upgraded Wells from a hold to a buy-equivalent rating on Monday, naming it a top pick. Analysts bet that this year’s significant underperformer is poised to catch up, citing a “clearer path to improving profitability in 2027.” The analysts’ price target of $102 suggests roughly 27% upside from Friday’s close, sitting about $6 above the stock’s record high in early January. Wells Fargo shares rose 1.5% Monday but remain down 12% year-to-date. In comparison, BNY surged 24%, Citi gained nearly 11%, and Goldman Sachs is up about 2%, while the Invesco KBW Bank ETF rose 4%. Both BNY and Goldman are Club names.

The timing of this call is particularly striking. Instead of waiting for Wells to report next week, Morgan Stanley is betting that the major pressures behind its underperformance are already easing. The willingness to make such a call ahead of fresh results caught Jim Cramer’s attention. “Typically we would not get anything of substance ahead of the numbers,” Jim said on CNBC just before the Monday opening bell. “It was a very big call,” he added later during Monday’s Morning Meeting.

Analysts view 2026 as a transition year for Wells Fargo following the removal of the Federal Reserve’s punitive $1.95 trillion asset cap last June, which had restricted the bank’s balance-sheet growth for over seven years. Freed from that constraint, Wells rapidly expanded, ending June with $2.23 trillion in assets, up 15% year over year. However, to achieve that growth, Wells initially relied on more expensive borrowing to fund lower-yielding assets, which squeezed net interest margin (NIM)—a profitability metric measuring the difference between what a bank earns on interest-bearing assets, such as loans, and what it pays to fund them. While customer deposits are the cheapest source of funding, banks also use more expensive wholesale funding channels when they need money quickly. This is where Wells found itself. Now, with the initial burst of balance sheet growth slowing, Morgan Stanley said Wells should need less expensive borrowing and can fund more of its business with lower-cost customer deposits. Higher interest rates could provide another tailwind. Morgan Stanley expects NIM to stabilize around 2.42% through the first quarter of 2027 before expanding to 2.49% by the fourth quarter. “Normalizing balance sheet growth should ease funding pressure, stabilize NIM, and raise our conviction in the path to higher returns,” the analysts wrote.

In the more immediate term, CFO Mike Santomassimo said at a September 15 conference that Wells’ NIM for the third quarter was running ahead of expectations. The opportunity extends beyond better margins. Morgan Stanley said Wells can “earn more fees from relationships where it is already committing capital,” particularly through investment banking. In other words, instead of just loaning a company money, Wells can provide more advising on mergers and acquisitions. Wells has hired roughly 150 senior bankers over the past four years, gained share in M&A and equity capital markets, and more than doubled investment banking fees from 2022 levels, according to Morgan Stanley. Still, those fees remain well below peers relative to the size of Wells’ commercial loan book. Analysts estimate narrowing that gap could eventually generate roughly $4 billion in additional annual fees.

“This piece says it’s finally happening,” Jim said of Wells’ investment banking buildout, a priority for CEO Charlie Scharf. It is a highly relationship-driven business, so having respected bankers helps bring in business, though it takes time to scale. While we highlighted Wells’ investment-banking push back in 2024, the bank is not in Dealogic’s top 10 global M&A advisor rankings this year. Goldman is No. 1, holding the top spot it secured in 2025. “[Scharf] is bringing in the right people, and they’re going to begin to win some deals,” Jim predicted. That is an important part of the story going forward. Wells doesn’t need another massive balance sheet expansion to drive the next leg of growth. It can make more money from the larger franchise it has already built.

Morgan Stanley expects Wells’ return on tangible common equity—a key measure of how effectively a bank generates profits from shareholder capital—to rise from 15.5% in 2026 to 17% in the second half of 2027 and 18% in 2028. The firm argues that improving profitability isn’t reflected in the stock, underpinning the upside to its $102 price target. We agree the setup is attractive, with shares trading at less than 11 times forward earnings, according to FactSet. That’s down from a 13 multiple at the start of the year. While we were frustrated earlier this year that the asset-cap removal wasn’t leading to better quarterly results, Wells did enough in July to keep us around. If next Tuesday’s results show NIM stabilizing while Wells continues making progress in investment banking and other fee businesses, investors may finally start giving the stock more credit for the earnings power Scharf has spent years building.

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