Unveiling the Q3 Financial Stocks Under Pressure

As the third quarter looms, the financial sector, often seen as a bedrock of stability, is flashing cautionary signals for a couple of its titans. Savvy investors are closely scrutinizing market indicators and fundamental shifts, with two major players, Morgan Stanley (NYSE: MS) and Apollo Global Management (NYSE: APO), drawing particular attention for potential turbulence ahead.

Is it time to re-evaluate their positions in your portfolio?

Let's begin with Morgan Stanley (MS), a name synonymous with global finance and wealth management. While a powerhouse, recent quarters have revealed some concerning undercurrents. A significant red flag emerged from its investment banking division, which saw a notable 27% year-over-year decline in revenue during the first quarter, bringing it down to $1.15 billion.

This isn't just a minor dip; it reflects broader challenges in capital markets and deal-making, which are crucial for a firm of Morgan Stanley's stature. Compounding this, the bank's compensation and benefits expenses surged by an alarming 19% year-over-year, hitting $7.13 billion. This upward pressure on costs, coupled with softer revenue streams, creates a squeeze on profitability that investors cannot ignore.

Beyond the fundamentals, the technical charts for Morgan Stanley are also sounding alarms.

The stock appears to be on the verge of forming a "death cross," a bearish technical pattern that materializes when the 50-day moving average dips below the 200-day moving average. For chart watchers, this is often interpreted as a strong signal of impending downward momentum, suggesting that recent price declines are gaining strength and could lead to further significant losses.

The combination of declining revenue, rising costs, and a looming death cross paints a challenging picture for MS as we head deeper into Q3.

Next on the watchlist is Apollo Global Management (APO), a leading alternative asset manager. Unlike Morgan Stanley, Apollo has already confirmed a "death cross" on its charts, a clear technical indicator of bearish sentiment taking hold.

This isn't just a fleeting signal; it often precedes periods of sustained weakness, making it a critical point of concern for investors considering its immediate future.

The technical warnings for Apollo are reinforced by shifts in analyst sentiment. Throughout July 2024, a notable trend of downward revisions in earnings estimates for Apollo Global Management has been observed among financial analysts.

This collective re-evaluation by experts often indicates growing concerns about a company's future earnings power, suggesting that the initial optimistic outlook may no longer be justified. A primary driver behind these revisions appears to be the broader interest rate environment. Higher interest rates can significantly impact alternative asset managers like Apollo, particularly their ability to borrow capital affordably for future deals and acquisitions.

A constrained borrowing environment could directly impede their growth strategies and deal-making capacity, which are central to their business model.

In summary, while both Morgan Stanley and Apollo Global Management are formidable names in the financial world, their current trajectories demand a cautious approach.

Whether it's declining investment banking revenue and rising expenses for MS, or a confirmed death cross and interest rate sensitivities for APO, the signals suggest that Q3 could present significant headwinds. Investors are advised to conduct thorough due diligence and consider whether these financial giants align with their risk appetite for the coming quarter.