NEW YORK ( TheStreet) -- Morgan Stanley (MS - Get Report) may face tougher scrutiny than usual from investors when it reports fourth quarter earnings before the market opens on Friday, as its shares were the clear sector leader in the fourth quarter of 2013, gaining 16.36% despite returns on equity that lag both peers and the bank's historical performance.
Analysts are looking for earnings of 44 cents a share on revenue of $8 billion, compared to 50 cents on $7.9 billion in the third quarter and 45 cents on $7 billion in revenue in the fourth quarter of 2012.
Investors have been willing to excuse lackluster return on equity because the company has been focusing on businesses viewed as likely to produce consistently solid results. Still, there are signs the positive view of the stock may be wearing off.
Deutsche Bank analyst Matt O'Connor downgraded Morgan Stanley last month, arguing the turnaround under CEO James Gorman was now mostly priced in.
O'Connor also downgraded Citigroup (C - Get Report) in the same report, a move that proved prescient ahead of disappointing results from Citi on Thursday.
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Management under Gorman "has delivered on a number of key strategic initiatives around the equities business, wealth mgmt, ibanking, expenses and capital," O'Connor wrote, though he added performance in the fixed income currencies and commodities unit "remains disappointing."
That weakness is likely to have continued in the fourth quarter, said Sanford Bernstein analyst Brad Hintz in an interview with TheStreet on Thursday.
"This kind of follows what Gorman would like, which is a fixed income business which is evolving to a customer support business," Hintz says.
Hintz expects "flat" performance in the equities business due to lower volatility, but strength in investment banking and wealth management.
Morgan Stanley should get a boost, however, from investing deposits it receives from Citigroup as part of its acquisition of Citi's Smith Barney wealth management business.
As for expenses, an area that has long been a problem due to highly paid investment bankers and traders, Hintz isn't optimistic.
"Morgan Stanley still has a compensation issue in its institutional business," he said.
-- Written by Dan Freed in New York.