Goldman Sachs and Morgan Stanley were downgraded by Atlantic Equities on Wednesday, as concerns grew about how investment banking activity could be affected by a potential recession. Research analyst John Heagerty downgraded Goldman Sachs to underweight from neutral and Morgan Stanley to neutral from overweight. Heagerty said both banks in particular have some positive events on the horizon while bearing the risk of further declines in investment banking activity that may accompany an economic downturn. “While trading activity has so far held up well and credit conditions remain relatively harmless, the highly inverted yield curve combined with various macroeconomic indicators suggest a recession may arrive in 2023, likely leading to a further decline in IB activity and a fall in equity markets, both both of which have an extraordinary impact on the income of investment banks,” he said in a note to clients. The analyst cut his Goldman price target to $290 from $330, implying an 8% decline from Tuesday’s close of $314.87. He also lowered his Morgan Stanley price target by $10 to $85, implying a small gain from the previous close of $83.97. Banks have taken center stage as potential losers in recessionary periods. Concerns have begun to swirl about the health of Credit Suisse, one of Europe’s largest banks. Meanwhile, Goldman became the first on Wall Street to cut jobs in response to a decline in transaction volume. A period of severe recession can bring a 50% to 60% decline in share prices for both banks. Heagerty’s bear case puts 2023 earnings per share down 36% and 29%, respectively, for Goldman and Morgan Stanley if there is another 20% decline in IB fees, trading revenue and equity markets. Investment banking is a larger part of Goldman and Morgan Stanley’s business than any other bank. According to Atlantic Research, IB makes up about 25% of Goldman’s revenue and 17% for Morgan Stanley. That’s well above the industry-wide average of 10%. “Our sensitivity analysis shows potential earnings pressure from a 20% drop in IB fees, trading revenue and equity markets,” he said. “Inevitably, Goldman Sachs and Morgan Stanley have the lowest exposure of the big six banks.” — CNBC’s Michael Bloom contributed to this report.