Cautious Optimism for Capital Markets Coming Out of 1Q24

Cautious Optimism

Managements are circumspect, but generally, very guardedly, optimistic. Coming out of 1Q24 earnings season, CEOs tended to sound optimistic notes, albeit highly qualified ones. Modal expectations seem to be for continued economic recovery—perhaps sluggish, perhaps in fits and starts and not without some weak patches, but recovery nonetheless. By the same token, few seem willing to entirely discount the possibility of a recession. For the time being, however, markets have generally been opening more widely, and firms that endured layoffs in 2023 are hiring, at least on a targeted basis.    

Fixed income underwriting strength driven by corporates, ABS. For investment banks that have released 1Q24 results as of this writing, aggregate debt underwriting fees were up 58% year over year, and 81% sequentially. The strength was driven by corporate issuance (up 38% year over year and 136% sequentially) as well as ABS (up 52% year over year and 81% sequentially). The first quarter activity reflected some pull-forward of activity—precisely how much is to be seen—as the quarter saw a somewhat outsized share of 2024’s debt refinancings completed.

Figure 1: Debt underwriting fees

Figure 2: Fixed income issuance ($Billions)

Equity underwriting up with IPO market starting to open more. For investment banks that have released 1Q24 results as of this writing, aggregate equity underwriting fees were up 69% year over year, and 51% sequentially. The IPO market began to open up a bit more (at least relative to prevailing post-COVID levels) and the volume of follow-ons hit a post-COVID high. Improved market performance of recent IPOs is encouraging, although the volume of S-1 filings does not suggest especially strong pipeline growth yet.

Figure 3: Equity underwriting fees

Figure 4: US IPO pricings

Figure 5: US IPO filings

Figure 6: US equity follow-on pricings

M&A remains weak but pieces in place for 2024 improvement. M&A activity remains sluggish, with aggregate fees for advisors reporting 1Q24 results so far essentially flat year over year, and down 16% sequentially. Advisors continue to report rising levels of interest, however, aided by stabilization of interest rates and rising CEO optimism. Activity has been skewed toward strategic buyers, but there is a widely shared expectation that sponsors will become more active in 2024. The more aggressive regulatory stance of the past few years remains a headwind, however, particularly with respect to large transactions.

Figure 7: Advisory fees

Figure 8: US M&A announcements

Figure 9: Global M&A announcements

Figure 10: CEO confidence turned positive in the 1Q24 Conference Board survey

Sponsor activity appears set to pick up. While the level of buyout dry powder continues to tick down, sponsors have a large backlog of invested capital to be monetized. With the leveraged loan and IPO markets having opened up more in 2024, and the early 2024 shift to a higher-longer expectation for interest rates removing what had been an incentive to hold off, monetizations seem likely to pick up, with capital both returned to LPs and deployed in new transactions.  

Figure 11: Aggregate buyout dry powder

Figure 12: PE dry powder declining slightly at listed alternative asset managers

Boutiques’ recruiting commentary generally positive. Evercore and Moelis each added six senior bankers during the quarter, and most managements expressed satisfaction with the volume and tenor of ongoing recruitment conversations.  

Figure 13: Advisory firm MD counts

Liability management driving restructuring strength. While the volume of Chapter 11 filings continues to rise, the restructuring market currently remains driven more by the need for otherwise healthy companies to reconfigure their ZIRP-era liabilities to be more sustainable in a more normalized rate environment.  

Figure 14: Chapter 11 bankruptcy filings continue trending up

Trading Results

FICC and equities up sharply vs. 4Q23. For the six US global banks, FICC revenues were up 56% sequentially, and equities revenues were up 32% sequentially on strength in both cash and derivatives.  

Figure 15: FICC revenues

Figure 16: Fixed income ADV ($Billions)

Figure 17: Equities revenues

The Benefits of Higher-Longer

Curve remains inverted, probability of Fed cuts keeps declining, but there are positives. Even in just the past week, the probability of the anticipated September rate cut slipped further. The early 2024 shift to higher-longer has had some beneficiaries, however—not least the advisory boutiques. The dissipation of expectations for what were as many as six rate cuts at the start of the year has both removed an incentive for sponsors to hold off on monetizations, and also heightened the urgency for firms to restructure balance sheets with liabilities that were optimized for ZIRP.

Figure 18: The yield curve remains inverted

Figure 19: Fed Funds Futures imply the sole 2024 rate cut will come at the September 18 FOMC meeting

Figure 20: Capital markets stock performance and valuation

Source: FactSet

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