U.S. bank stocks have underperformed the broader market this year, despite rising rates and strong earnings results. Now, one outspoken analyst on the Street recommends investors take advantage of the recent weakness and "go all in" with U.S. financial plays, rating five out of five Big Bank stocks at buy, as outlined by CNBC

Morgan Stanley to Gain Over 35% on Evolved Business Mix, Sector Tailwinds

In a note to clients on Wednesday, Wells Fargo analyst Mike Mayo offered an upbeat outlook on the five largest U.S. banks, offering particular applause to Morgan Stanley (MS) shares, which he upgraded to outperform. 

Known for his tough criticism of industry executives and his previously bearish take on the sector at large, Mayo lifted his 12-month price target on shares of Morgan Stanley from $56 to $60. His new price forecast implies a 37% upside from current levels. 

Last week, the Wall Street giant posted Q3 results which surpassed the Street's top and bottom line estimates. Mayo attributed solid earnings results this year and in the recent quarter to better than expected trends in trading, wealth and investment management, and revenues. These larger sector tailwinds should also help boost shares of Wall Street peers Goldman Sachs Group Inc. (GS), Citigroup Inc. (C), J.P. Morgan Chase & Co. (JPM) and Bank of America Corp. (BAC), according to the Wells analyst, who recommends buying all five stocks while they remain down YTD. 

Bank Stocks Lag Broader Market 

Stock YTD Stock Performance
Morgan Stanley -16.6%
Goldman Sachs -16.2%
Citigroup -13.3%
JPMorgan -2.6%
Bank of America -10.2
Average S&P 500 1.3%

"Long-term, MS has evolved its business mix more than any other large bank with an increase in wealth and asset management to 1/2 the firm from 1/3 earlier this decade," wrote Mayo. 

Moving forward, Mayo expects Morgan Stanley to up its financial targets in January, also noting upside from the removal of retention bonuses by April, as reported by Barron's. In June, he foresees business improving under the Comprehensive Capital Analysis and Review, based on commentary from management. At large, the bank's dominance in capital markets and wealth management should allow it to expand its market share and reap the benefits of scale, which have been "elusive" in the past, added Mayo. 

Trading down about 1.6% on Wednesday morning at $43.79, MS stock reflects a 16.6% downturn YTD, sharply underperforming the broader S&P 500's modest 1.3% return over the same period.