The M&A Growth Cycle Is Not Over, but Expense Pressure Weakens Valuation Upside

Overview

From the day before 2Q 2026 results began through the report period, independent investment bank stocks fell by about 2% on average, underperforming the S&P 500 by about 5 percentage points, mainly due to earnings estimate cuts, a potential temporary gap in M&A activity in the second half, and expenses coming in above expectations. Goldman Sachs judges that the industry is still in the middle of the M&A cycle and that the overall growth path over the next several years remains solid, but the growth slope of large strategic M&A may weaken, with the baton passing more to mid-sized transactions, financial sponsor M&A, private equity secondary share transactions, and restructuring. At the same time, rising compensation and non-compensation expenses make operating leverage improvement more difficult, and industry valuations are no longer cheap; therefore, stock performance will depend more on earnings estimate revisions and differences in business mix.

Core views

First, large and strategic M&A has rebounded sharply from cyclical lows, with current volume near or above historical highs, and further growth depends more on companies accelerating transactions under the current U.S. regulatory environment. Second, financial sponsor and mid-sized M&A remain below historical peaks, and exit pressure, aging private equity assets, and dry powder provide structural support for a subsequent recovery. Third, private equity secondary share transactions and restructuring advisory businesses are expected to continue growing and enhance the countercyclicality of independent investment bank revenue. Fourth, senior banker hiring costs, artificial intelligence and data investments, travel, and other expenses remain persistent pressures; although pretax margins are expected to improve, they remain significantly below the peak of the previous cycle. Fifth, industry valuation rerating potential is limited, so priority should be given to companies with stronger revenue growth, market share, business diversification, and expense discipline.

Analysis framework

The report combines 2Q 2026 results versus consensus expectations, Dealogic M&A volume and transaction counts, historical cycle peaks and troughs, M&A volume as a share of global equal-weighted market capitalization, the age of private capital, the correlation between interest rates and restructuring revenue, company revenue mix, compensation and non-compensation expense ratios, and next-twelve-month P/E ratios to cross-assess the industry's cycle position, sources of revenue growth, operating leverage, and relative stock attractiveness.

Methodology notes

• Industry cycle analysisM&A cycle segmentation framework

  Segment the M&A market by strategic or financial sponsor characteristics and transaction size

  Compare large strategic M&A and small/mid-sized financial sponsor M&A in terms of year-over-year growth, gains from cyclical lows, distance from historical peaks, and share of global equal-weighted market capitalization to identify growth slopes and potential inflection points.

• Earnings analysisOperating leverage decomposition

  Decompose margin changes into compensation and non-compensation expense leverage

  Use compensation expense ratios, fixed compensation as a share of revenue, non-compensation expense ratios, and pretax margin forecasts to judge whether revenue growth can be effectively converted into earnings growth.

• Business mix analysisRevenue diversification and countercyclical framework

  Assess the buffering effect of private equity secondary share transactions and restructuring businesses against traditional M&A volatility

  Assess the structural growth of non-M&A advisory businesses by combining the revenue contribution of related businesses, aging private equity assets, capital return pressure, debt maturity walls, interest rates, and bankruptcy filing trends.

• Relative valuationHistorical P/E percentile comparison

  Use next-twelve-month P/E and ten-year historical percentiles to judge valuation room

  The industry average next-twelve-month P/E is about 16.0x, around the 60th percentile over the past ten years; combined with the M&A cycle position, this indicates valuation expansion room is now smaller than the room for earnings estimate upgrades.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Americas independent investment banking sector

  Direct beneficiary asset of the M&A cycle and advisory activity

  Strengths

  The M&A growth cycle has not ended, and private equity secondary share transactions and restructuring businesses provide additional structural growth.

  Weaknesses

  Expense growth weakens operating leverage, and industry valuations are already in the upper-middle range historically.

  Comparison

  Large strategic M&A is already at a high base, while mid-sized and financial sponsor M&A have greater subsequent growth potential.

  Risks

  A gap in M&A activity in the second half, continued earnings estimate cuts, or expense ratios exceeding expectations.

• EVR

  Key Buy-rated name, benefiting from market share gains and growth in non-M&A businesses

  Strengths

  Revenue growth is expected to exceed peers, backlog is strong, business diversification is relatively high, and private equity secondary share transaction business has a relatively high contribution.

  Weaknesses

  Still exposed to the industry M&A cycle and rising expense pressure.

  Comparison

  Expected 2025-2028 revenue CAGR of 15%, above the peer average of 11%.

  Risks

  Slower transaction completion pace, market share gains below expectations, or cost investments depressing margins.

• LCLN

  Key Buy-rated name, benefiting from acceleration in mid-sized and financial sponsor M&A

  Strengths

  Smaller scale brings higher growth elasticity, with growth achievable through organic investment, market share gains, and potential M&A.

  Weaknesses

  Shorter listing history, and business expansion places high demands on execution capability and expense control.

  Comparison

  Expected 2025-2028 revenue CAGR of 15%, above the peer average of 10%.

  Risks

  Delayed recovery in mid-sized transactions, insufficient returns on expansion investments, or M&A integration below expectations.

• PIPR

  Key Buy-rated name, skewed toward mid-sized transactions and with a more flexible cost structure

  Strengths

  Higher exposure to mid-sized M&A, a more variable compensation structure, and relatively better non-compensation expense discipline.

  Weaknesses

  Higher sensitivity to mid-sized corporate transactions and the financing environment.

  Comparison

  Compared with peers oriented toward large M&A, it is more likely to benefit from an acceleration in mid-sized and financial sponsor M&A from low levels.

  Risks

  Macro and geopolitical uncertainty suppressing mid-sized corporate transactions, or weakening of expense control advantages.

• PJT

  Key Buy-rated name, benefiting from restructuring and other non-M&A advisory businesses

  Strengths

  The restructuring business can benefit from debt maturity pressure, high interest rates, and increased bankruptcy filings, and has some countercyclical characteristics.

  Weaknesses

  The timing of restructuring revenue recognition may fluctuate, and traditional M&A business remains affected by market cycles.

  Comparison

  Compared with peers whose businesses are more concentrated in traditional M&A, its revenue mix has stronger cycle-buffering ability.

  Risks

  Lower interest rates or an improved credit environment leading to weaker-than-expected restructuring demand.

Key data

• Industry share price performanceDown about 2% on average, underperforming the S&P 500 by about 5 percentage pointsThe starting point is the day before the first company reported 2Q 2026 results, around July 22, 2026.
• Year-to-date 2026 M&A volumeUp about 40% year over yearMainly driven by large and strategic M&A.
• Growth in large and strategic M&ALarge up about 80%, strategic up about 55%Both are year-over-year changes in announced transaction volume year-to-date 2026.
• Growth in mid-sized and financial sponsor M&AMid-sized up about 30%, financial sponsors up about 5%Clearly lagging large strategic M&A, forming a lower base for the subsequent recovery.
• Share of financial sponsor M&AAbout 26%Below the average of about 35% over the past five years and about 32% over the past ten years.
• Private equity secondary share transaction volumeUp 19% year over year in the first half of 2026GP-led transactions grew about 35% year over year and, for the first time since 2021, accounted for the majority share.
• Share of non-M&A advisory revenueAbout 18%Goldman Sachs estimates the combined share of private equity secondary share transaction and restructuring advisory revenue in total revenue for the sample of independent investment banks in 2025.
• Aging private equity assets59% of unrealized value has been held for more than five yearsAbove the historical level of about 50%, increasing pressure on managers to return capital to investors.
• Industry pretax margin forecast adjustmentsLowered by 10, 25, and 20 basis points for 2026, 2027, and 2028, respectivelyMainly due to compensation and non-compensation expenses that were higher than previously expected.
• Expected year-over-year pretax margin improvementAbout 140, 190, and 120 basis points in 2026, 2027, and 2028, respectivelyMargins remain significantly below the 2021 cyclical peak.
• Industry valuationAverage next-twelve-month P/E of about 16.0xAround the 60th percentile of the past ten years; the historical percentile calculation excludes LCLN, which has a shorter listing history.
• EVR investment viewBuy, 12-month target price of $377, potential upside of 23%Revenue CAGR from 2025 to 2028 is expected to be 15%, above the peer average of 11%.
• LCLN investment viewBuy, 12-month target price of $28.50, potential upside of 16%Revenue CAGR from 2025 to 2028 is expected to be 15%, above the peer average of 10%.

Impact & implications

At the industry level, M&A revenue still has upside, but the market structure is changing: the high base for large strategic transactions may slow their marginal growth rate, while private equity exit pressure and a recovery in mid-sized transactions will increase the relative benefits for related advisory firms. Because expense ratios are rising and valuations are not low, relying solely on growth in industry transaction volume is no longer enough to support a broad rerating; the market will place greater emphasis on earnings estimate upgrades, share gains, revenue diversification, and expense discipline. As a result, LCLN and PIPR, which have exposure to mid-sized and financial sponsor clients, and EVR and PJT, which lead in private equity secondary share transactions, restructuring, and diversified advisory businesses, are relatively more attractive.

Risks

• A temporary gap in M&A activity may emerge in the second half of 2026, leading to further revenue and earnings estimate cuts.
• Large strategic M&A is already above historical highs, and the growth slope may turn negative faster than expected.
• Valuation gaps between buyers and sellers, as well as macro and geopolitical uncertainty, may delay the recovery in financial sponsor and mid-sized M&A.
• Senior banker hiring and fixed compensation costs remain persistently high, limiting declines in compensation expense ratios.
• Rising costs related to artificial intelligence, data subscriptions, travel, and energy may cause non-compensation expenses to continue exceeding expectations.
• The long-term returns on artificial intelligence investments remain unclear, and investors may increase scrutiny of related spending.
• Industry valuations are in the upper-middle historical percentile range, and if earnings estimates lack upgrades, the risk of valuation compression increases.
• Changes in the U.S. antitrust enforcement environment may weaken large strategic M&A activity.

What to watch

• Whether large strategic M&A can continue growing from a high base in the second half of 2026.
• Whether financial sponsor M&A can form a sustained inflection point after improving in June and July 2026.
• Whether small and mid-sized transaction volume as a share of global market capitalization can recover from historical lows.
• Whether pressure on private equity managers to return capital drives more asset sales and continuation fund transactions.
• Whether private equity secondary share transactions can achieve the industry's expected growth of about 10% to 15% in 2026.
• Whether restructuring revenue can recover to about 2% growth in 2027 after an expected 2% decline in 2026.
• Whether compensation and non-compensation expense ratios continue to be revised upward from 2026 to 2028.
• Whether artificial intelligence and data investments can generate verifiable revenue or efficiency returns.
• The transaction backlogs, market share, and direction of earnings estimate revisions for EVR, LCLN, PIPR, and PJT.