Into 3Q26 EPS, mid-cycle and air pocket concerns weigh, although long-term M&A ingredients intact, and increasing attractive valuation

Independent investment bank (IBank) stocks fell ~10% on average in 3Q26, underperforming the S&P 500 by 12pp, driven by multiple derating and estimate downgrades, and as investors increasingly discount cyclical concerns. In our view, with the long-term ingredients for the M&A market to grow remaining largely healthy, and current multiples at only 45th %ile levels over the past decade – representing later cycle multiples - the entry point to the group has begun to appear attractive for the first time in some months. Key investor concerns include: 1) the view that we are mid-M&A cycle, which typically leads to multiple derating, as IBanks perform best in the early cycle; 2) a more challenged near-term operating backdrop, given the M&A air pocket that could continue into 4Q26 and enhances mid-cycle worries;