Investing.com -- Oppenheimer downgraded several large U.S. bank stocks on Tuesday, arguing that rich valuations have left little room for further upside despite improving earnings prospects and a favorable operating environment.

The brokerage downgraded Goldman Sachs and Morgan Stanley to Underperform from Perform, while cutting Bank of America and Citigroup to Perform from Outperform. It maintained Outperform ratings on PNC Financial Services and U.S. Bancorp, recommending investors rotate into alternative asset managers such as ARES Management, Blackstone, and KKR.

Oppenheimer said the banking sector has shifted from years of structural undervaluation to valuations that now reflect optimism over sustained earnings growth. Commercial banks are trading near the upper end of historical valuation ranges, while investment banks are trading well above long-term averages as investors price in strong investment banking activity and trading revenue.

The brokerage raised its second-quarter 2026 earnings estimates, citing stronger-than-expected trading performance, and lifted its 2027 forecasts after increasing its assumptions for global investment banking activity. It now expects the investment banking "wallet" to reach about 46 basis points of U.S. nominal GDP, roughly 20% to 25% above what it considers a normal level.

Goldman Sachs and Morgan Stanley received the largest upward revisions to 2027 earnings estimates because of their greater exposure to trading and investment banking, although Oppenheimer said their elevated valuations were no longer compelling. It also expects universal banks to benefit from the stronger investment banking backdrop.

While the firm sees no immediate catalyst to derail banks' earnings trajectory over the next several quarters, it warned the industry remains mature and cyclical, with expansion eventually giving way to another downturn. It said trading businesses may pose greater long-term risks than traditional lending, though it did not predict when the next period of market stress could emerge.

For the second quarter, Oppenheimer expects trading to be the primary driver of earnings upside across the sector, while stronger investment banking activity is forecast to fuel another year of double-digit earnings growth in 2027.