(Reuters) - Market volatility and economic uncertainty amid ever-changing tariff talk are set to push out the much-anticipated robust investment banking rebound in 2025, Morgan Stanley analysts said in a note on Thursday.

Wall Street was expecting a banner year for capital markets activity in 2025 after U.S. President Donald Trump was elected in November, buoyed by hopes of less regulation and lower corporate taxes.

But the optimism has so far failed to translate into activity as clients take a wait-and-see approach in response to trade policy uncertainties.

"We are now living in a new reality. The daily whiplash of tariff talks is significantly raising uncertainty for CEOs, boards, and sponsors looking to plan, negotiate, and launch deals," Morgan Stanley analysts said.

Investment banking announcements and completions so far in the first quarter are lighter than expected, they added.

Morgan Stanley now forecasts a subdued capital market activity in the first half of 2025, with a more meaningful uptick in the third quarter.

This prediction assumes that market volatility and recession concerns subside in the coming weeks as the market gains more clarity on tariffs.

PEAK UNCERTAINTY

Despite the market volatility, Morgan Stanley analysts believe the overall environment for dealmaking remains supportive, as antitrust enforcement is expected to shift towards a more traditional approach, away from a slow and scope-expanding method.

Private equity firms are also sitting on $4 trillion of uninvested capital that needs to be deployed along with years-long pent-up demand across both sponsors and corporates.

Dealmaking is expected to resume as managements get comfortable with economic outlooks over the coming months, Morgan Stanley analysts said, adding that we are likely at peak uncertainty around tariffs.

In a separate note on Wednesday, Morgan Stanley analysts said activity had already started to pick up on a week-to-week basis, citing BlackRock's $23 billion Panama Canal port deal announced earlier this month.

"This large cross-border deal sends a message that some investors are confident enough to take action," they said.