NEW YORK ( TheStreet) - Is it possible that Goldman Sachs ( GS) is once again facing competition on Wall Street?

Morgan Stanley ( MS), the underdog of the two remaining Wall Street securities firms, appears to be digging in its heels for a fight.

Morgan Stanley is moving forward with its business realignment, with James Gorman at the helm as its new chief executive. It turned a corner of sorts in the third quarter, reporting a profit of $498 million, after losing more than $13 billion in the three preceding periods. The current average analysts' view is for the firm to report another profit of 36 cents per share tomorrow.

Morgan Stanley's nascent turnaround is not significant just for itself, but also in what it means for Goldman Sachs.

The two firms have seen many competitors fall to the wayside, or get snatched up by bigger money-center banks. As everyone knows, Bear Stearns, Merrill Lynch and Lehman Brothers are no longer standalone competitors. Their operations are now part of JPMorgan Chase ( JPM), Barclays ( BCS) or Bank of America ( BCS), or they're kaput.

Morgan Stanley and Goldman survived the crisis of course, but as Goldman reported blockbuster earnings in 2009, Morgan Stanley hasn't had such a sunny stretch. The firm has been realigning its business strategy, while writing down mortgage exposure and less-profitable credit-market bets.

Goldman out-earned its competitor by an average of roughly $4.45 billion per quarter over the past year as a result. A big portion of that gravy came from fixed income trading, which recently lost its status as a major earnings generator as credit spreads have thinned out and activity has moderated.

Sandler O'Neill analyst Jeff Harte recently advised clients to "expect a year-end slowdown in equity and fixed income trading revenues," citing a "slowdown in asset appreciation."

"Some firms should have difficult comps from the last couple of quarters," Harte said.

In tandem with that sentiment, high-profile banking analyst Meredith Whitney slashed earnings estimates for Goldman on Jan. 6, a few months after she cut her rating to neutral from buy.

Morgan Stanley appears to have set its sights on wealth management rather than proprietary trading profits alone. Morgan is in the process of combining its major Smith Barney acquisition from Citigroup ( C) with its existing business. As that integration process continues to iron out kinks, and more people turn to advisors in a widespread yield-seeking mission, Morgan Stanley could be a winner.

At the same time, it has strived to make its name more prominent in the league tables -- a historic point of contention between Goldman and Morgan. Morgan Stanley has advised the government on several large, high-profile bailouts, including American International Group ( AIG), Fannie Mae ( FNM) and Freddie Mac ( FRE). Both Goldman and Morgan have advised on four of the 10 biggest M&A deals in 2009, according to data from mergermarket.

Analyst sentiment on Morgan Stanley has gotten more bullish, with doubting Thomases having been quieted last quarter. For instance, Richard Bove of Rochdale Securities initially thought Morgan Stanley's new business model was a bad one. Five months ago, he predicted inconsistent execution, "erratic" earnings and workforce woes as it inched outward on the investment risk spectrum.

But earlier this month, Bove changed his tune, telling Bloomberg he "loves" Morgan Stanley and predicting a big increase in its stock price this year, along with other big banks.

Analysts, including Bove, are still more bullish on Goldman, however. Fifteen Wall Street prognosticators are advising clients to buy Morgan Stanley stock, vs. two with sell ratings, and another 10 telling clients to hold. Nineteen advise clients to buy Goldman, none advise selling, and seven advise holding.

Over the past year, Goldman's stock has outperformed, rising 126%, vs. a 95% increase for Morgan Stanley shares. But as Morgan sentiment has gotten more bullish recently, so has its stock price: Morgan Stanley shares are up 2.6% this year, vs. a 2.1% decline in Goldman Sachs.

When the two firms report fourth-quarter results this week, it won't be surprising if Goldman out-earns Morgan Stanley once again. Wall Street's current consensus view is for Goldman to earn $5.19 per share, far above the 36-cent earnings prediction for Morgan Stanley. But the question isn't really how much the firms earned last quarter, but how much room they have to grow in 2010.

The competition is evident in the battle over their earnings date alone. Although competitors tend to choose different days to report, and vie for the first position if results are astounding, Goldman made a surprising move after Morgan Stanley said it would report on Jan. 21: It chose the same date. Morgan Stanley then countered on Jan. 8, moving its report up a day.

While that may seem uninteresting logistics to some, the Wall Street Journal reported that the jockeying was "no accident" and "turned heads on Wall Street." Bloomberg followed up on Monday, saying that while Morgan Stanley had its "worst year ever" in 2009, as Goldman reported blockbuster earnings, 2010 may be "a different story."

Wednesday will provide the first evidence as to whether such predictions are correct.

-- Written by Lauren Tara LaCapra in New York

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