Love them or hate them, there's no denying the white-shoe Wall Street firms have been on fire. Bear Stearns (NYSE:BSC), Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), and Lehman Brothers (NYSE:LEH) announced strong earnings in September. (Merrill Lynch (NYSE:MER) is set to report earnings Tuesday.)

While a favorable business environment has driven these firms to record levels of profitability, continued momentum is no certainty. Revenues from trading, mergers and acquisitions, and underwriting are highly linked to the business cycle and market sentiment. While Goldman Sachs and Lehman announced a strong pipeline of future deals, Morgan Stanley reported its equity underwriting pipeline is "down significantly." Will the good times roll for the premier names in investment banking?

The Motley Fool CAPS community certainly thinks so. Three firms have a four-star rating (out of five stars), indicating that investors still have high expectations.




Goldman Sachs

Four stars



Lehman Brothers

Four stars



Bear Stearns

Four stars



Morgan Stanley

Three stars



Merrill Lynch

Two stars



It's no surprise that Goldman stands at the top of the chart. It is, after all, the gold standard on Wall Street, with arguably the best brand name and the top talent. Lehman and Bear Stearns also have high ratings, while Morgan Stanley and Merrill Lynch bring up the rear.

It's a little surprising to see Morgan Stanley and Merrill Lynch in this position. Along with Goldman Sachs, they are generally regarded to be the cream. Many institutions want to be known as global investment banks; these firms have a legitimate claim to that title. Furthermore, Morgan Stanley has displayed its continued appetite for growth with a bold move into Chinese banking (see "Morgan Stanley's Great Leap Forward"). CEO John Mack's turnaround has gained momentum, and even the struggling Discover credit card experienced a 15% increase in revenues last quarter.

Perhaps there is a different dynamic at play here. While Goldman, Lehman Brothers and Bear Stearns are pure-play investment banks, Morgan Stanley and Merrill Lynch are less homogenous in their mix of activities. For Morgan Stanley, this is a result of its 1997 merger with Dean Witter, Discover, which saddled it with a retail brokerage and the Discover card business. Integrating these different activities and cultures has been traumatic and led to a shareholder revolt that was quelled with then-CEO Philip Purcell's departure in 2005. Merrill Lynch has long combined an institutional securities franchise with a massive brokerage network.

By comparison, it's very clear that the focus of their peers has paid dividends. Goldman Sachs has been going gangbusters for several years, with great results in proprietary trading and a tremendous push into alternative investments (private equity and hedge funds). Bear Stearns and Lehman Brothers have been smaller players with strong fixed-income franchises. In recent years, Lehman has expanded its footprint methodically through internal growth and smart acquisitions, such as that of fund manager Neuberger Berman in 2003. The firm has now put together a string of great quarters. Bear Stearns has been more conservative, but its results are a testimony to the strength of its core franchise.

The flip side of a focused set of activities is that firms may be more exposed to a downturn in the business cycle or the financial markets. For now, though, the CAPS community appears to endorse the notion that the same focus that has served Goldman, Bear Stearns, and Lehman so well in the past few years will continue to fuel market-beating returns. For Morgan Stanley and Merrill Lynch, CAPS members are less sanguine: Apparently their model, which lies somewhere between pure-play investment bank and universal bank (think Citigroup (NYSE:C) or JPMorgan Chase (NYSE:JPM)), is a more difficult sell.

For related Foolishness:

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Fool contributor Alex Dumortier and sector head Joey Khattab do not have beneficial interests in any of the companies mentioned in this article. Alex welcomes your (constructive) feedback. The Motley Fool has a strict disclosure policy.