Good morning. Welcome to Morgan Stanley's third quarter 2026 earnings call. On behalf of Morgan Stanley, I will begin the call with the following information and disclaimers. This call is being recorded. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at morganstanley.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements in this discussion. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. This presentation may not be duplicated or reproduced without our consent. I will now turn the call over to Chairman and Chief Executive Officer Ted Pick.
Thank you, operator. Good morning, and thank you for joining us. In the third quarter, Morgan Stanley delivered strong performance on the top and bottom lines with firm-wide revenue of $20.3 billion and earnings per share of $3.03. With a return on tangible equity of 22.6%, this quarter marks our fifth consecutive quarter above 20%, speaking to the consistent strength of our global franchise. Total client assets across wealth and investment management grew by nearly $400 billion during the quarter to a record $10.5 trillion. Against a complicated backdrop, the quarter's overall performance speaks to the momentum of the integrated firm. Wealth management continues to scale as clients entrust us with additional assets and deepen their relationships with Morgan Stanley. Wealth had a record quarter with revenues of over $9 billion, with milestone levels of net new assets of $232 billion and fee-based flows of $80 billion.
This sustained performance reflects the strength of our financial advisors, the breadth of our unique capabilities and product offerings, and the trusted partnerships that distinguish our integrated firm. Institutional securities delivered $10 billion of revenue, up 18% YoY. Equities led the way with another outstanding quarter at $5.8 billion. Clients largely remained active as we deepened engagement across our global franchise. On the forward, banking pipelines remain high and strategic dialogues inside corporate boardrooms are active and generally receptive to action. Clients are seeking advice to capitalize on the current dynamic growth environment while accepting some additional structural volatility. Pent-up demand and catalysts to drive scale and productivity in a more constructive regulatory backdrop support an ongoing favorable outlook for investment banking activity. In short, we remain positive about the ongoing ability to monetize the corporate finance life cycle across the investment bank.
Stepping back, the third quarter unfolded in two distinct phases. July and August were unusually brisk as risk appetite was dominated by hyperscaler investment in the build-out of the AI ecosystem. In contrast, as Labor Day approached, we observed the headwinds of renewed tensions in the Middle East and higher interest rates globally as central banks moved to keep inflation at bay. Market volumes were slower across asset classes as investors and institutional actors gauged risk-reward into the fourth quarter and year-end. As we move through October, the two known unknowns that we wrote about in our March shareholder letter, namely the acceleration of AI at the enterprise level and the risks associated with geopolitical conflict, have reached a critical juncture.
In the glass is mostly full camp, the enormous capital, which continues to be raised and deployed across the AI ecosystem toward efficiency, resiliency, and productivity, is driving U.S. nominal GDP growth of 5%-6%. Large cap corporate earnings continue to move higher. The economy is at full employment. The Fed is focused on managing long-term inflation expectations, and the salutary effects of common sense regulation are kicking in. In the glass is half empty camp, persisting conflicts in the Middle East and Ukraine, meaningfully higher benchmark interest rates and energy prices around the developed world, elevated asset prices in a fourth year of a bull market for equities, and uncertain electoral and policy responses in both the U.S. and globally are reasons to be more cautious.
As we move into the fourth quarter, it is clear to us now that these two known unknowns and how they interact and which of the third quarter's narratives, half full or half empty, holds the upper hand will drive investor and corporate behavior into year-end and into the first half of 2027. Against either backdrop, financial strength remains a key pillar of Morgan Stanley. We continue to actively support clients while remaining well-capitalized. Our very healthy level of excess capital with 300 basis points of excess CET1 contributes to our financial strength and affords us with substantial flexibility ahead. We look forward to continued dialogue and upcoming transparency as our regulators finalize the bank capital regulatory framework. As we enter the final quarter of the year, Morgan Stanley remains aligned and cohesive, focused on delivering higher highs and higher lows through the cycle.
Particularly when the environment is as complex as it is today, it is essential that we continue to execute on our clear and consistent strategy to act as trusted advisor to our clients, raising, managing, and allocating capital across the integrated firm. With that, I'll turn it over to Sharon to take you through the quarter in greater detail.
Thank you, and good morning. In the third quarter, the firm delivered strong results. Revenues of $20.3 billion, EPS of $3.03, and an ROTCE of 22.6%. Growth momentum from the second quarter carried into the early part of the third quarter, with markets focused on AI investment and continued economic expansion. However, rising energy prices and interest rates weighed on market activity following a shortened post-Labor Day September. Despite market uncertainty, corporate activity remains strong, reflecting continued strategic dialogue. Ongoing client engagement reinforces the opportunity for our integrated firm to deepen relationships and support future activity. Year- to- date, the firm's efficiency ratio was 66%. Strong revenues drove operating leverage, more than offsetting elevated execution-related costs compared to the prior year. We continue to invest across our technology stack, embracing AI tools to support our infrastructure, business growth, and people.
Together, these investments position us to strengthen our competitive moats across the integrated firm. Now to the businesses. Institutional securities revenues were $10 billion, up 18% versus the prior year. The YoY increase was driven by our leading equities franchise and a pickup in advisory. Exit momentum from the second quarter carried into July, before client activity and markets moderated through September. Boardroom dialogue remained strong through the quarter, supporting the build of strategic pipelines and future capital markets financings. Investment banking revenues were $2.2 billion, up 2% from the prior year, reflecting strength in the Americas as well as in Asia, consistent with our expectations of a sequential broadening out of global activity. Advisory revenues of $887 million drove results. The increase relative to the prior year period reflect higher completed activity across most sectors.
Equity underwriting revenues were $525 million, down compared to broad-based strength in the prior year, with a few large deals driving the market. Fixed income underwriting revenues continued to be strong at $747 million, supported by a new issue market that remained active. Pipelines remain robust and diversified across products, sectors, and regions. Strategic activity remains healthy, supported by ongoing corporate investment, portfolio repositioning, and capital allocation priorities. AI continues to contribute to the advisory and capital markets momentum, but activity is broad-based across sectors and products. Turning to equity, revenues were $5.8 billion, increasing 41% versus the prior year, reflecting growth across products and across Asia. As client needs become more complex and global, our integrated franchise is well-positioned. Our investments in technology and talent have strengthened our capabilities, allowing us to serve at greater scale and manage risk more effectively in fast-moving markets.
Prime brokerage drove results led by growth in financing revenues on higher average client balances. Derivative results increased versus the prior year, driven by higher client activity early in the quarter and strong risk management. Cash results were higher YoY, driven by increased client volumes across regions. Fixed income revenues were $2 billion, reflecting lower structured activity in credit and commodities. Macro results increased modestly compared to the prior year, aided by foreign exchange. Micro results declined YoY, driven by lower performance in securitized products. Commodity results were solid, though declined against a strong comparative period that benefited from structured transactions. Turning to ISG lending and provisions. In the quarter, ISG provisions were $141 million, driven primarily by portfolio growth. Net charge-offs were $105 million, primarily related to certain corporate and commercial real estate loans, which were largely provisioned for in prior periods.
Turning to wealth management. The business delivered records across key growth indicators, including net new assets of $232 billion and fee-based flows of $80 billion. In the first nine months of the year, we have delivered roughly $500 billion of net new assets and about $175 billion in fee-based flows. These results demonstrate the reach of our multi-channel model and our ability to connect clients with trusted advice. Revenues of $9.1 billion and pre-tax profit of $2.8 billion were also records. The pre-tax margin of 30.4% shows consistent strength as we invest in technology, marketing, and our banking capabilities to support future growth. Asset management revenues grew 16% YoY to $5.5 billion, benefiting from higher markets and the cumulative impact of robust fee-based flows. Fee-based flows of $80 billion set a new organic record, with nearly half coming from a corporate retirement mandate.
We continue to expand our retirement capabilities and deepen engagement with plan participants, creating more opportunities to build advice-based relationships over time. Transactional revenues were $1.2 billion, up 6% YoY, excluding the prior year's DCP benefit. While trading activity moderated from the second quarter, retail engagement across our differentiated product offering remains healthy, with alternatives delivering another quarter of record sales. Bank lending balances grew $5 billion sequentially, driven by securities-based lending and mortgages. Total deposits grew by nearly $30 billion sequentially to $465 billion, reflected investments to strengthen our bank offering. Net interest income was $2.2 billion, down modestly as deposits grew and the mix shifted. Looking ahead, we expect a modest increase in the fourth quarter, subject to rates and client behavior.
Lastly, net new assets of $232 billion reflect the strength of our core business and the differentiated growth opportunities created by Workplace and the integrated firm. IPO-related flows once again contributed to just over half of the overall NNA. With an active IPO calendar, the pace of our funnel accelerates and client interest in advice increases. While flows will fluctuate as lock-ups expires, funds make distributions, and individuals use assets for consumption, our pipeline and our connectivity across channels allows us to build relationships early and deepen them over time. Since acquiring E*TRADE and expanding our Workplace offering six years ago, we have added over $2 trillion of net new assets. Our multi-year track record demonstrates our differentiated client acquisition funnel and its durability. Today, we have $8.4 trillion in client assets and serve nearly 21 million relationships.
Our platform and broad product offering enables us to serve our clients across a wide range of needs, while our scale supports continued investment in future technology, including AI and digital tools. Together, these strengths provide us with a powerful competitive advantage that positions us to lead as the future of wealth management takes shape. Turning to investment management. Consistent strength from Parametric and fixed income contributed to long-term inflows of $15.8 billion. Parametric continues to benefit from distribution through our scaled wealth management platform, while fixed income was supported by strong performance. Revenues of $1.5 billion reflect steady growth in asset management and related fees. Carry reversal, primarily related to two investments in a private fund, muted overall results. Looking ahead, we continue to invest in opportunities related to global distribution and connectivity with our financial advisors. Turning to the balance sheet.
Total spot assets ended the quarter at $1.7 trillion. Standardized RWAs increased sequentially to $596 billion as we actively supported clients in our markets business and continued to grow corporate lending. We repurchased $1.5 billion of common stock in the quarter, and our standardized CET1 ratio ended at 14.9%. Our quarterly tax rate was 23.3%. For the fourth quarter, we expect our tax rate to be slightly above the third quarter's tax rate, and our full year guidance remains unchanged. Amid a changing rate environment and geopolitical uncertainty, we remain a trusted advisor to clients. This environment underscores the value of the integrated firm, as we leverage capabilities across businesses to address evolving client needs. With $10.5 trillion in total client assets across wealth and investment management, we have the foundation to build on as we close out the year.
With that, we will now open the line up to questions.
We are now ready to take any questions. To get in the queue, you may press star and the number one on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star and the number two on your touch tone telephone. You are allowed to ask one question and one follow-up, then we will move to the next person in the queue. Please stand by while we compile the Q&A roster. We will take our first question from Steven Chubak with Wolfe Research.
Morning, Steve.
Good morning, and thanks for taking my question. This is a meaty one, so I am just going to limit it to one question, but a two-parter. Just on the topic of digital infra, CapEx spending, and the implications for future revenue growth. You guys have been the leader just in digital infra-related financing activity. We see that in the league table numbers for both ECM and DCM. As we look ahead, do you think there is room for digital infra-related IB fees to continue to grow off the current base, even as a larger portion of equity and debt financing is expected to migrate from the public to the private markets? For the second part, I was hoping you could just speak to some of the ancillary revenue streams tied to a lot of this digital infra build-out that exists outside of the core IB franchise.
Certainly, SpaceX and the NNA tailwind, it should be a durable source of strength and wealth, but whether there is other sources of revenue related to this opportunity that might be overlooked by the investor community.
Yes. Meaty questions. On AI, of course, we are still relatively early in the CapEx cycle. Whether it ends up being $10 trillion or more or less, we will see as it plays out, but the hyperscaler CapEx is running as we speak at around a trillion a year. Our role as an advisor in all pieces of this will remain to be a critical differentiator. We are advising clients on the full ecosystem of their strategic and capital markets alternatives. We are helping them innovate, we are helping them finance through the life cycle, and we are working really across the full ecosystem, whether it is our teams working to help build public solutions or private solutions to act as an innovator across the world.
Whether we are working with the chips folks, the data centers, or the power providers, the activity from here may not accelerate, but I think we all see that the power of AI, as an efficiency and productivity and resiliency tool, is incontrovertible, a generational jump in technology. The relationships and innovation that Morgan Stanley brings to our clients will absolutely be critical as friends become frenemies in certain contexts. Maybe not permanent friends, but permanent interests in the context of who does deals with whom and how they are structured, in what market, where on the capital structure. That requires real structuring knowledge, real expertise, and real trust. The Morgan Stanley team has shown itself to be quite excellent here as a differentiator and importantly, what clears the market.
Sometimes the technology will be ahead of what the market will accept, and sometimes vice versa, and we have to be cognizant of what the market will accept at a given time. Some judgment there is, of course, experiential judgment is critical. Steve, on your net new asset question, we see a lot of growth associated with IPO events, but beyond the IPO channel, when we look at Workplace and our presence with so many private companies, we believe that this cycle has many years to come. Net new assets will ebb and flow in a given quarter, but as Sharon said, let us take a step back and remember that we bought E*TRADE six years ago. This completed the funnel. The funnel is this extraordinary self-directed piece, the Workplace, and then of course, the financial advisor.
And we generated $1 trillion of net new assets in the three years subsequent to the acquisition of E*TRADE. Then the last three years, we drew in another $1 trillion. So $1 trillion over three years, two three-year sets running, shows not only our ability to make the proposition, the case, that scale begets scale, but the reinvestment from within the funnel is clearly here. Of course, as lockups and funds make distributions, there are further opportunities to retain assets. So we are very excited about the attachment points ultimately that bring clients to E*TRADE, that we are close with them in the corporate stock plan context, i.e. Workplace, but then ultimately, where it is appropriate, fee-based flows that make their way to the advisors, which is why that $80 billion number that Sharon speaks to, the fee-based flows, is such an important statistic.
We will take our next question from Brennan Hawken with BMO Capital Markets.
Hello, Brennan.
Good morning. Thanks. Hey, Ted, how are you doing?
Go ahead.
Was hoping to follow up on that last point. The net new at $232 billion, really quite impressive. You flagged the benefits from the IPOs despite a slower quarter for issuance. Could you speak to how much of that was a tail from prior deals versus the current quarter? What is the best way that we should be thinking about that tail, as we think about quarters still to come?
Sure. Thanks, Brennan. I will take it. You highlight a really good point, that we talk about IPOs, and we talk about them as not just one quarter, but you use a word that I use as well, which is there is a tail to this process. So in the second quarter, you will note, specifically even in the press release, I think I spoke about it in my prepared remarks, we talked about the flows that came from the IPOs being largely employee-related. In this quarter, what you saw is a continuation of these flows that come from IPOs, which is not necessarily just a one-quarter event. As you know, we have a full cap table. We understand early investors. You can think, for example, of an endowment that might receive a stock associated with an IPO.
He or she might take that and put it through from a transfer agent into a Morgan Stanley advice-based relationship. So now you have flows that are under the advice-based channel and are through, say, a different portion of the cap table. You might, as Ted said, also have flows that are now distributed from funds that go into individual-based accounts, right? So the fund takes it, and the lockup expires, and they are distributed to the underlying investor, on an individual level. So there is a lot of places where that funnel begins to move into an advice-based relationship. Of course, as we move forward, Ted said it, you can ebb and flow, and you can see people actually, as lock-up expires, selling stock and using it for different acquisitions of different real assets. But the point is that this is the top part of the funnel.
It's really a way to continue to aggregate new assets, new employee relationships, and we're seeing that. We're seeing with some of these IPOs, the first or the third quarter. Now that some of these IPOs have come to market, real relationships, advisor-led relationships being built. That's just one piece. That's one piece of the top of the funnel. You also have, as you probably saw, these corporate retirement flows that are coming through as fee-based assets where we're also talking to the individuals. So it's all a very big picture that we've been investing in for many, many years that has to do with both the Workplace and the individual, and the corporate life cycle of wealth.
Thanks for all that color, Sharon, and good to see the funnel operating so well. I'd love to also ask another question on wealth. The deposit growth was really robust here. Although it was driven realistically by the sort of higher cost variety, could you speak to maybe how this growth is related to the bank and what you're doing there with funding of ISG operations and how we should think about those benefits playing through, whether there's a lag and how long that might take? Thank you.
Sure. Yeah, absolutely. So, thank you. You hit the nail on the head in terms of what you see from NII, which is a very modest decline in the NII from a QoQ basis, but a very large increase in the deposits of nearly $30 billion on a sequential basis. This is a very intentional decision, a strategic choice that we've made to grow the bank. We saw an opportunity to do so. I'd say that it's twofold, both from an integrated firm perspective, but also from a wealth management perspective. From the integrated firm, we've talked a lot about the bank and using the bank more strategically as a source of funding, and we saw that as we've begun to move assets into the bank, eligible assets that move into the bank over the course of the year.
Yes, I think I spoke about it in the first quarter call that that will be something that we'll see from a funding benefit as we enter into next year. So it's not immediate. It will come over time, and you'll see that play in through our numbers, over the course of next year. But in addition to the funding benefit, I'd also should mention that we do see really strong attachment points that are coming from the bank. So those clients that are bank first clients, over time, we've seen that one-third of them end up being a digital client or in a relationship, an advisor-based client as well. So that also helps. In addition, they end up also having more, multiples more of NNA that comes to the institution.
We see a real opportunity to grow the bank, both from the wealth management perspective and the top of the funnel, but also from the funding side that will play out over time.
We'll move to our next question from Glenn Schorr with Evercore ISI.
Hey, Glenn.
Hello there. We've all asked the banks on agentic cash and all that movement. But from time- to- time, people have the same questions on how changes in technology are going to impact the wealth business going forward. I know you guys invested in OpenAI before I knew that was a company. But outside of just the normal efficiency and advisory productivity that you're getting, I'm curious on, as the leaders in wealth, what investments you're making and how you see the wealth advice as a service evolving in this technological backdrop. Thanks.
Glenn, it's a critical question for Morgan Stanley as a strategic matter. We are now in a singular position in the industry where we see the integrated scaling of the funnel that you described. We have the self-directed channel that continues to innovate for clients. We have, as Sharon was describing, a differentiated Workplace offering that continues to expand and source new relationships. We have ultimately, the deep trust-based relationships between the financial advisors and their clients. Against that platform, we have built a number of advantages that not only allow us to preserve our moat, but actually, make technology a differentiator in our favor. I'd highlight four. The first is, we all bear in mind that we've got a unique set of products and capabilities as the largest distributor in the world. We're the most important wealth partner to the entire asset management industry.
There are significant parts of our alts platform, both product and pricing, that are not available to clients anywhere else. You are a Morgan Stanley client, you have access to our research, you have access to the calendar, you have access to private markets via EquityZen, you have co-investment opportunities, and then importantly for ultra-high net worth, family office infrastructure solutions. The scale that we have offers differentiation that will remain and even be aided by agents. Second, unique data. With $8.4 trillion of assets in wealth management and now getting to 21 million households, we have tremendous insights into what works and what doesn't when you talk to your financial advisor.
You want to gauge on a particular day or particular month or particular year, what your risk-reward sentiment ought to be, how you should be thinking about life, and some of that can be governed by what others are doing through the use of data. It gives us insights, given our size and scale, that allow our FAs to tailor advice and equip our own tools to deliver that advice to help clients achieve their goals. Third, and this is critical, is the ability to protect client assets. We're one of a very few number of firms that could continue to invest whatever it takes to protect our clients. Others, you can't engage head-to-head with AI out of your garage. There will be a resiliency theme that will be super important to clients with real net worth as we go forward.
The fourth point, and this is really where it begins, where it ends, is it's a people business. At some level, if the technology is world-class, folks want to make decisions with their financial advisors based on the complexity and singularity of their own financial needs at a particular point in life, with respect to their parents, their kids, how they want to go about philanthropy, how they want to go about taxes, the whole thing. That is something that technology can help do a lot of the early work.
But ultimately, once you know that you have the ability to allocate across the entire asset spectrum, given that we are the largest distributor in the world of any kind of asset management product, given that we have insights from the unique data, and given that we are a protective shield for those assets, ultimately it comes down to, do I trust my financial advisor? And if I do, I'm at a place where the advisor retention rate is above 99%, and the clients obviously are quite happy. Which is why over time it's so important that we continue to scale not quarter- to- quarter, but over multiple years, and that we see the reinvestment in the funnel.
That the funnel becomes not only a way to preserve our moat, but actually to be a technology winner, which is dating back to some of what you talked about, but continues today. So I'd say of all the many things to be excited about, I'd say now what the management team is most excited about is our ability now to further our scaling and, over time, our operating leverage in the wealth management business.
Well, I appreciate that very full answer. I'll pass on to my peers. Thanks.
Thanks, Glenn. Appreciate it.
We'll take our next question from Christian Bolu with Autonomous.
Good morning, Ted and Sharon. Maybe first another question on the impressive IPO flows into wealth management. Sorry if I missed, Sharon, on your earlier answer, but are you still expecting incremental flows in 4Q and 2027 of what you've had so far? Then more broadly, how should we think about the economics of these flows? Are you seeing any signs that you can ultimately retain and turn them into annuitized fee-based assets?
Absolutely. Why don't I take it, and I'll take the last one first, which is that we are absolutely seeing that we can retain the assets. We're seeing a pickup in the ability, and this is trying to allude to in the last answer, is those IPOs that came to fruition in the second quarter, that we are building relationships, advisor-led relationships. There's a lot of opportunities to do so, and there's a lot of interest to move forward. We will continue to build on those relationships, not just with where we've started now, but I think there's more opportunities to go with those individuals. As it relates to retention rates, we're seeing steady retention rates. What does that mean? It actually means that the dollars of assets is greater.
If you can keep the retention rates where they are, even as you get more flow, more assets at the top of the funnel, yes, that means that eventually that will help from a fee-based advisory flow as well, or an advisor-led product, or an advisor-led relationship. As it relates to the second quarter, there's nothing material to call out in terms of expectations for those flows as you move forward. But as we said, assets will ebb and flow. You can think of an individual who might sell assets in order to buy something, but you can also think of individuals that now have those advice-based relationships and begin to aggregate assets held away.
That's been a lot of the strategy, even over the course, if you go back 10 years, we have talked about that, Christian, which is we see a great opportunity with assets held away. These individuals have just stepped into wealth. They begin to consolidate assets and understand the value of a fulsome advice-based relationship.
Great. Thank you, Sharon. On expenses, non-comp expenses were flat QoQ firm-wide despite lower revenues. I think you spoke about some AI investments in your prepared remarks.
Give me a sense of more detail here. What are you spending on? Is it tokens, or are there more structural AI investments? Should we think about this as a multi-year investment program?
Yeah, I think that you will see that from any company in America is using their technology dollars to think about how to use AI, how to be more productive, and how to support greater growth and revenues with their current expense base, with some of that translating into technology itself. So sort of a redistribution of dollars as you move forward. How do you actually see that productivity? Again, anybody who works in sort of a senior management role can tell you how much AI is fundamentally changing what our own selves do. I can speak as just as head of finance. What we're seeing is remarkable. The reconciliation that you can see across different books, things that usually take so many manual human hours and can have, obviously there are controls in place.
The ability to see it with fewer errors and fewer mistakes and fewer checks is real. In addition to that, there are just manual processes and manual, what we call EUCs, which are spreadsheets and others. They can automatically be written, understood, coded, and then moved into our real productivity life cycle, sort of front to back of products. So it's an incredible tool. We're seeing it in the actual businesses themselves, even within our equities business, where you have different AI tools that salespeople can use. I think that that productivity is real, and that's where a lot of the spend is being seen.
We'll take our next question from Mike Mayo with Wells Fargo.
Morning, Mike.
Hi. Hey, you talked about half full, half empty. In the half empty column, you've had concerns about the AI CapEx super cycle as it relates to overbuilding, power, financing, politics, and you can probably complete that list a lot more. Where is your conviction on the AI CapEx super cycle in light of all these headlines? You've had some pulled IPOs, and last quarter you talked about CapEx. I think you had numbers like $800 billion- $1.3 trillion- $1.5 trillion. I'm just kind of marking the market the way you're thinking about it. Thank you.
Yeah. And Mike, I actually think this question is just going to have to be asked over and over again. Because the quantums are so big, and the growth of the U.S. economy is at some level, and even the global economy being powered by this AI CapEx cycle. I don't know that it necessarily accelerates from the trillion that we're at. It could be $1 trillion, it could be $1.2 trillion , but we are at a level where it is meaningful, 50, 70 basis points of real GDP in the U.S. That is no small matter. And then how many years it takes. I mean, as we've talked about, sometimes the technologies can be ahead of the financing, the financing ahead of the technology.
But the efficiency and productivity, and then obviously the need to protect, all of these are incontrovertibly important for every large cap institution over time. Every institution, of course, it's not just at the enterprise level, it's at the individual level. The key is our ability to continue to act as an advisor. That is what we are most focused on, that we are able to effectively act as the clearing mechanism in this very complicated ecosystem between all of the players, such that we are viewed as a fair hand in acting as the advisor, the structurer, the financing partner. If a deal doesn't clear the public markets, what do they do next? Do they raise private capital? How do they do that? How do they satisfy the needs of their LPs and other constituencies?
It will be complicated, i.e., there will be moments of uncertainty, and I have no doubt there will be times when it'll feel like it's going too fast, and there is a sense of overbuilding in some respects. And then there are going to be other times when it's not fast enough, and that there's a different bottleneck in the ecosystem. Perhaps it's power. But the reality is the capital is going to have to be provided for this once in a multi-generation change. As we talked about, S&P 500 value is somewhere between $65 trillion and $70 trillion. Global GDP is, let's say, $120 trillion. These are sort of the denominators one can talk about.
$1 trillion is a heck of a lot in a given year, but $1 trillion against some of the best performing companies of modern times that are still running cash flow positive to something that becomes, you got to be in it to win it. That is conceivable, really, over the course of five, 10 years, that it could be at a run rate that is plus or minus a trillion dollars. And our role is when things feel like they're going too fast and the market's not ready for the next financing or structure innovation, we have to effectively consider what is appropriate. And then when it's not fast enough because the capital is needed, we throttle accordingly.
I continue to be humble and as querying as anyone with respect to whether the right number for, let's say, 2028 on hyperscaler CapEx is $1.2 trillion or $1.4 trillion or $1 trillion. But the number is going to be, we see, $1 trillion and at some kind of plateau level continue to be a very important part of what we all do in the capital markets as originators, in delivering content, and again, in bringing real sustained, not just efficiency, but productivity improvement to large cap companies.
Where the rubber meets the road, you have to allocate resources for the AI opportunity. In light of what you just said, the risks and opportunities, are you allocating more or less to the AI opportunity, and how are your backlogs?
We were, as you know, over-weighted to AI from the early days in wealth with some of the work we did with OpenAI. We've been over-weighted working with other complexes. You know who they are in terms of banking coverage, in terms of usage in our plan, in terms of wealth relationships, in terms of thinking about what it's like to go public. I would say that we were overweight, and in light of it being something that matters not just to our clients, but to us, I would say we are now double overweight. There is just no question that this is existentially important that we are viewed as a trusted advisor in the middle of the ecosystem, given that we have a very clear strategy where we are acting as the wealth manager, the asset allocator, the banker.
For us to be part of the content and the thinking and the evolution of this is absolutely the top priority for the firm as the advisor. Then also that we're eating our cooking, and that we are providing resiliency and all that comes with the need to keep up with all of the innovation. I appreciate the question, Mike.
Our next question comes from Dan Fannon with Jefferies.
Thanks. Good morning. You guys have talked about fee-based flows being key to the margin expansion within the wealth channel. As you have more success with migrating Workplace clients to advice, should we see this convergence of the total flows and the fee-based flows continue? Or is that something that will always kind of have some spread to it?
That's a great question, Dan. It's going to depend really on what flows end up seeking what type of advice and those that want to be part of the fee-based ecosystem. What we've seen is, let's take this quarter as an example, right? The fee-based flows, we talked about a portion of those fee-based flows coming from a corporate retirement mandate. As you bring a full corporate retirement mandate on board, those will also be considered net new assets, right? Because it's coming in immediately as a fee-based flow. You can have other situations, and we saw big backlogs where we had dollars accumulate just in brokerage, both on the advisory side and on the self-directed side, that then move into fee-based flows. Those are just individual accounts.
You might have also relationships between stock plan, where people aggregate assets and move them directly into fee-based. I think it just will depend on what flows you're discussing. Importantly, we do see that that value of advice, either they come in directly as a fee-based account or they come in and they migrate over time from self-directed or otherwise, is critically important. I think a statistic that I gave you guys earlier in the year was that a little bit over 20% of all of the advisor-led flows are fee-based flows. I mean, that still holds if not growing. That just shows you how powerful the fee-based model and the advice-led model is.
Thank you. That's helpful. And then just a follow-up on NII, and we heard your outlook for Q4. But as you look at the rate backdrop today, trends in loan growth still seem to be positive. Is it reasonable to think about loan NII growth as we think about 2027 based upon where things sit today?
Yes. We do expect to see NII over next year expand, and to your point, that's largely on the back of loan growth.
Our next question comes from Ebrahim Poonawala with Bank of America.
Morning, Ebrahim.
Hey, Ted. Morning. Hey, Sharon. I guess just one question first on when we think about the wealth management business, like the conversion from Workplace seems to be going extremely well. All the investments you talked about. In a world where there's a lot of focus on just downside risks to the revenue environment, how should we think about that pre-tax margin? It's 30%. I get you're making investments for the foreseeable future, so you're not short-term targeting a higher pre-tax margin. I'm trying to get to, is all this conversion going to translate into a better pre-tax margin environment? If things were to slow down, does it add to defensibility of earnings within that business and to the firm-wide ROE? If you could help us sort of think through that.
Yes. The answer is yes. The pre-tax margin will expand over time with scale. To your point, our intention is not to manage it on a quarter-by-quarter basis. It's to make investments over the long term. You've seen us make those investments across our channels, Workplace, self-directed, and advisory. That increases the breadth of the funnel, moves it to fee-based, and we see an expansion of margins since the beginning, this inception of this larger business model well over a decade ago.
I mean, Ebrahim, just to add to that, we really tried to be very disciplined about the slide deck and these targets, these objectives, and to really meet them and beat them. As you know five quarters of above 20% ROTCE, and some would say, "Okay, then are you going to raise that?" Then you're at 30%, are you going to raise that? We're really trying to, again, speak to, as you know, the core of our very long-term real money shareholder base. They want multiple year returns, higher highs, higher lows in all seasons. Now, obviously, if we're risk off and things are really tough and the glass is more than half empty, it's three-quarters empty, we're going to be slower because there's going to be less to do.
This idea of having something that really is close to all weather, but then can actually power higher over time just on scaling, and the ability to actually activate the funnel, that is what the team is most focused on. If there was one statistic of all of the sea of statistics, and I know that the market backdrop in the last couple of days has been more mixed, but if there's one takeaway, it's $1 trillion of net new assets over the last three years, which was preceded by $1 trillion of net new assets in the preceding three years. The key then is, will those assets make their way ultimately to fee-based flows into the financial advisor? In many cases, yes.
The ability for us to, with the financial advisor, monetize that singular experience and actually to have technology act as our friend here over the long expanse of time. The long expanse of time. That should create incremental operating leverage. The answer is ultimately yes.
That's good color. Separately, I mean, it still feels like a sandbox, but the SEC put out some rules around tokenized equities. Just talk to us, what does that mean for your business? How are you investing and the ability of the firm to, one, defend, share, gain share if we move, if it gains steam, as far as just broad-based tokenization of equities is concerned?
Sure. I think that Ted, in one of his comments, said we're excited about the future of wealth and investing in this, what does it mean to think about the future of wealth management? The tokenized world is just a portion of that, and the tokenized world means it's faster and easier to move assets around, and you will need advice to think about those assets, and how do you move those assets quickly? What are the right assets to move, and how do you think about token usage? So from our perspective, it's just an opportunity, another opportunity that we've been investing in. We've been investing in the digital space more broadly across both wealth and ISG, and I think we'll continue to be a leader, specifically as investors and clients demand advice.
Our next question comes from Devin Ryan with Citizens Bank.
Morning, Devin.
Hey, good morning, Ted. Good morning, Sharon. I want to start on institutional equities. Obviously, as we continue to see these really impressive results come through, revenues are almost double where they were in 2024. I think a lot of us and clients are trying to understand or better contextualize the cyclical versus secular elements. Obviously, we see the largest firms consolidating share. The prime businesses are doing great. It seems like geographies like Asia are structurally larger. Can you help us unpack, from your lens, how much of this feels cyclical versus just you're seeing a bigger pie, and there's new areas that are contributing that weren't historically, and you are gaining market share in those areas?
Well, we're still in a stock-based world. Equities are still, all things being equal, the attractive asset class. The question would be if interest rates were to back up further and it would start pinching corporate earnings, would you see earnings multiple contraction, and then it becomes less attractive to be allocated to equities, I mean, just sort of vanilla. We're still in an equities world, and we're seeing growth, and we're seeing the returns on capital being generated by very healthy large-cap corporates. So, when you put that together with the need for private equity and other private capital underwriters to effectively harvest their portfolio through the public markets, that is all kind of in our favor.
If we go way back in time, this is, I guess, 15 years ago, when we created the nine boxes, cash, derivatives, and prime brokerage in the three regions, we were recovering post-GFC, and we got the prime brokerage piece right early because we had world-class technology in MSET that linked us to a world-class high-touch cash product. That continues today. You see it in our mandates to stabilize IPOs. You see it in our ability to work large transactions for asset managers. You see it in our ability to deliver research content. What's changed here in recent years under the leadership of Alan and Gokul is really the build-out of a world-class derivatives business. This was something that I just didn't get done, and they have figured it out.
It's really the missing link in a world that has gone way beyond cash product to hedge, to express a customized view. It's a global business, and they've done a wonderful job knitting cash to prime brokerage through the derivatives product. In that sense, I'd say the equities business is more robust than it was seven or eight years ago. But it would be silly to say that it's not subject to cycles and investor sentiment. We saw in September when volumes were drying up in Asia, and that became sort of the re-underwriting moment in the U.S. Of course, the volumes are lower, which means the output is going to be lower for everybody in the ecosystem. But we clearly have found a position now that's an enviable one, where we act as a trusted advisor now in the secondary context to asset managers across the nine boxes.
Here, a little like wealth, actually much like wealth, scale is existentially important. You have to be faster, better, cheaper, in addition to having the ability to get the trust of the client, and you got to be global, which is why it matters that we're big in London and we're big in Paris. But so too, in Hong Kong, Tokyo, in Seoul, in India, and of course, in the U.S. So it's a business that I think incurs the benefit of the largest players. We will continue to focus on scaling that. We're also very focused on use of capital.
One of the underlying themes of today for us, in addition to the $1 trillion every three years, and I know there's a potential for distraction with all that's going on in the world, and the whole group reporting, is the fact that we have a 300-basis point CET1 buffer. That is not a small matter. That is something we have worked to achieve assiduously at the top of house in partnership with the business unit. And of course, there are other ways to measure usage, SLR, and the like, but we like the capital buffer because it, in different periods, will allow us to actually put more capital to clients through the equities and fixed income businesses when the opportunity arises.
That's great. I'll leave it there, Ted Pick, but appreciate the color, and I'll pass it along.
Thank you, sir.
We will now take one question, and then we will move to the next person in the queue. Please rejoin the queue for additional questions. Our next question comes from Chris McGratty with KBW.
Hey, Chris.
Oh, great. Thanks. Hey, Ted. Just going back to the prior question. So it is more of a geography capital allocation. Where are you most excited about next couple of years to lean into capital allocation domestically, internationally, by product? So maybe just a few comments there would be great. Thanks.
I'll take a crack at it. Sharon will improve my answer. I think the answer geographically is a global allocation. I think part of this is, you can't decide you wanted to be big in Hong Kong over the last three years. You already were in Hong Kong for the last 20, 25 years with a world-class team, or you weren't. We have been there. Tokyo, of course, is super hot. We've been there with our partners at MUFG. We have the largest high capital markets franchise in Japan, both clearing FX and also working in the equity space amongst the global firms. You sort of go down the tick list. A number of us have been in Europe the last couple of weeks, need to be big across the U.K. and the continent.
The U.S. continues to be fertile, especially in a world of dispersion where you want to own new issues and have performance that is just beyond beta. So I think the answer is a geographic matter. We've had edge in Asia for sure, but I think the answer is global. Again, I would give a similar answer with respect to the products. I think it's the integrated solution across cash derivatives and prime brokerage. I don't think you can just be the prime broker of choice. You have to have proper risk management and margin around the right clients. You need to be able to monetize them not just through the financing product, but through your ability to execute low and high touch cash and the derivatives product as well.
I would add that what's most critically important in this period is the integration across the markets businesses. Some clients, and this goes back to some of the AI questions, it isn't just a banking phenomenon. It becomes a fixed income secured lending, securitized lending phenomenon where we have a world-class group. So the micro and macro and commodities folks working closely with equities in an integrated markets offering where folks have sat in each seat and they want to generate the best risk-adjusted return for the client. That's something that is not just kind of a technocratic exercise, but also a behavioral one and something that is tried and true here because people get along real well, and that actually matters, and the clients see it.
Our next question comes from Erika Najarian with UBS.
Thank you for taking my question.
Thanks, Erika.
Just to take a step back. Ted , you are asked a lot about the pipeline as it relates to the AI super cycle, and I appreciate your prepared remarks. Just to zoom in on this a little bit. Clearly, the equity market or at least bank investors are starting to worry about the impact of sustainably higher rates, obviously both in the direction of the Fed and the 10-year. As you talk to your clients broadly across sectors and across the type of capital need, how are higher rates and the sort of sustained level in the 10-year impacting, if at all, sort of their decisions in terms of capital raising?
An excellent question. It is not just higher nominal rates, as you are saying. It is also higher real rates, and the reality that the cost of capital is nothing like it was during a financial repression or the years following with COVID and stimulus. So you have to have real capital structure, and if it does not work, it is something that resembles, in some cases, an investment-grade capital structure, in other cases, a sub-investment grade capital structure at sub-investment costs of capital on a traditional basis. If that is not working, the immediacy of the market is going to find that out. We as a structurer, as an underwriter, of course, we want to try to pick winners, and we want to be giving advice at the right place.
But where we are committing capital as a lender or helping in any respect, again, putting our own balance sheet to work, this is part of the implication of double overweight. Double overweight doesn't mean just that we are going to send bankers out to try to get business, but that we are being incredibly rigorous and sharp about where we want to allocate risk capital. Where a bridge or where a relationship loan that in theory was a piece of debt turns into a piece of equity, which eventually gets provisioned. I imagine there are going to be cases where we are going to make mistakes. That is just an inevitable reality of something that is a generational change. But our job is to minimize the foolishness and to make sure that we are active and where it makes sense for us to help bridge capital.
Ultimately, our value add again is the M&A advice, the strategic advice, versus just putting a bunch of balance sheet out. But you are right. When there is an elevated interest rate world, if interest rates are higher as a function of higher productivity and higher GDP, all is good. That is back to a world that we saw pre-GFC, where we see real GDP at 2% or 3%. And if this is helping stimulate that, I think that would be viewed as a very healthy and necessary phenomenon. If higher interest rates are the result of a lack of control over inflationary expectations or supply-side shocks as a result of some of the geopolitical tail risk, well, then obviously people are going to be less excited about putting up illiquid risk capital.
That is just the reality of private and public markets checking each other, and that is why we have super sharp people in our capital markets business, GCM, constantly working with the entire ecosystem to see what works, not just in the long term, but whether a market window opens or closes.
We will take our next question from Scott Siefers with TD Cowen.
Thank you, guys. Thanks for taking the question. A little bit of a follow-up on the capital markets state of play. I do have to say the glass half full, half empty analogy is probably the clearest and most balanced short form commentary I've heard sort of regarding where we are and can go. Was just hoping you could speak specifically to-
Thank you for that. Could you repeat that?
Yeah.
Could you repeat that?
Yeah.
I want to be sure that we- there are probably some listeners left. Just if you don't mind, give me a read back of that.
Whether you wrote it or others, it was a great one.
No, dude, I wrote it. I wrote it. I wrote it. No chat.
Well done.
Me.
Well done.
Okay. Middlebury College.
Excellent. Was hoping you could speak to the backlog in sponsor mandates specifically. That is an area that has not necessarily ebbed and flowed as much. Feels like it has been more of a waiting game for the last couple of years. How does that logjam break? What is sort of the holdup as you see it? I mean, is the answer the same as what you just said in response to the last question, or is it anything different as you see it?
Yeah, I will give you two answers on that. The first one is that at some point, the piper must be paid, i.e., the investment portfolio needs to be harvested. On the other hand, there has been, of course, a ton of engineering continuation funds, the ability to put some assets in new funds. In fairness, there are some very smart private equity investors and others in the private universe who have decided they actually want to keep some of these investments on their balance sheet, that these investments work in a higher interest rate world, back to Erika's question, and that actually, over time, if they can generate low-to-mid double-digit IRRs with whatever they think is the appropriate leverage, maybe they want to keep it for themselves, or maybe they want to bring the harvesting out later. That is my positive response.
My less positive, less salutary response would be, it is a little frustrating. There are some sponsors in the universe that are stuck on marks and models that are just not going to come to pass, given the market is very sharp to what is in folks' portfolio and very sharp to the reality of what the new weighted average cost of capital regime is around the world, and what incremental country risk or supply risk or AI risk means for that asset. The question is going to be, at what point are they going to come, and how are they going to come? I think, in some cases, the leading private equity firms and others have been incredibly smart and agile about bringing some stuff that maybe does not have a higher mark, but is ready for prime time.
And maybe they bring that along with stuff that is a big winner, so they've had sort of portfolio composition mix. And then in other cases, they're holding on and hoping for better. And I think it is probably a longer odds bet that we are going to have a low interest rate, low inflation, non-recessionary environment. I think that I would not bet on that. In which case, you really have to think about what old school corporate finance looks like for these companies. And I think the smartest and most important private equity partners that we have will be continuing to find ways to bring these companies to market against a favorable regulatory backdrop, whether they IPO them or go the M&A route. So in short, I think it is, with some conditionality here, I continue to think it is a positive tailwind.
Where perhaps I was mistaken was a couple of years ago, thinking it might lead the corporate finance life cycle. It's very clear to all of us that it's the strategic, real corporate universe that's leading the life cycle, and the sponsors have to hustle to keep up with, effectively, the strategic bid and the strategic demand for capital.
We'll take our next question from Ben Gerlinger with Citi.
Hello, Ben. How are you?
I'm good. Good morning. It's admittedly not the easiest or best way to look at your franchise versus others, but if you just look at league tables of equities or FIC or investment banking, you guys have stood out well in the areas that have been strong. Obviously, not trying to say the pie's gotten bigger, so you've clearly made strategic investments. When you look, you guys versus peers within FIC itself, it seems like you have excess capital, and you have a unique funding opportunity in front of you. Is FIC an area where there's a substantial amount of investment opportunity to take market share, or is it an area more so focused on equities because equity's on a global scale, has so much more expansionary opportunity in front of it?
Appreciate the question. As you may recall, there was a time when fixed income was an Achilles heel of the Morgan Stanley investment bank dating back 15 years. What is extraordinary about the leadership that Jay and Jacob have brought to bear is the utter stability of this business. Against some headwinds and crosswinds, these folks are generating efficient returns on capital and $2 billion a quarter. There was a time when we wanted to get to $1 billion a quarter. Importantly, the business is integrated with investment banking and capital markets on the private side and equities in a way that this institution has never seen, which is an extraordinary thing.
There is a lot of time that is spent helping to prosecute equities product or banking product that may not book into fixed income as an external segment matter, but absolutely books existentially in the underwriting line, the advisory line, the equities line. I think it is a world-class business. We are not a traditional natural in the sense we're not a commercial bank, dating back to all that.
Given the work that we've done to bring assets on the bank, and given now the cost of funding is more pari passu with the group, and given the talent we have, and given the importance of the AI ecosystem, and importantly, that we've built the product out globally, I think our commodities business with the two Niles, our macro business, and our micro business, Salva in Europe and others, these are folks that get the entire proposition of the integrated firm, and it's a business that we will continue to invest in over time.
Ladies and gentlemen, this concludes today's conference call. Thank you everyone for participating. You may now disconnect and have a great day.