2Q26 Capital Mkts Recap: Cowabunga! Surf's Up

Research evidence excerpt

2Q26 Capital Mkts Recap: Cowabunga! Surf's Up

Industry Update Equity Research

"Surf's Up" for Capital Markets

All 5 large US banks exceeded expectations in 2Q26 and for 1H26. That's both on the top and

bottom line, especially when it came to equity-related activities, which led the way and tend to be

more big bank activities (another advantage over regional banks). We increased our estimates and

price targets for all 5 of these banks either during earnings, or shortly before. Yet there are always risks

to monitor.

Main Investor Debate: Are We at Peak Capital Markets?

Investors question if capital markets are at peak levels. First, 2Q26 capital markets revenue is up

~3/4 from the 2017 trough, which is only around 1/2 of the average of the prior 2 cycles (up 200%

in the 1990s and up 113% from 2002 to GFC - see Exhibit 1 below). Cap markets revenue relative

to global GDP and global financial assets is also below peak. Second, large US players have mostly

indicated that there is more demand for PB and financing than they have in capacity. Third, debt

maturities support more DCM. Fourth, sponsors remain well below peak levels of activity and have

been as much as 1/3 of M&A activity historically.

Fifth, major banks like GS and MS stress that this is the early stage for the AI capex super cycle.

MS indicated that the capex cycle is only 10-15% done, according to the CEO. MS described the

expectations for AI-driven capital expenditures as significantly increasing since only last year, whether

for 2026 ($575B to $850B), 2027 ($700B to $1.3T), or 2028 ($1.5T), with a total of $10T possible

over a decade or so, albeit with a wide range of risks.

Our view: we see AI as transformative and believe that spending will continue at least for another