By Noor Zainab Hussain and Tatiana Bautzer

(Reuters) -Morgan Stanley beat first-quarter profit estimates on Friday, helped by record equity trading and strong wealth management results.

The bank reported record equity net revenue with a 45% jump from a year ago, reflecting increases across business lines and regions, particularly in Asia, with its biggest gains in prime brokerage and derivatives.

The bank earned $4.3 billion, or $2.60 per share, in the three months ended March 31. That compares with a profit of $3.4 billion, or $2.02 per share, a year ago. Analysts expected earnings per share of $2.20, according to estimates compiled by LSEG.

Shares dropped 1.9% in choppy trading before markets opened.

U.S. President Donald Trump's decision to impose heavy tariffs on major economies and the launch of China's generative AI model, DeepSeek, triggered a broad selloff in global markets.

"The volatility increased trading activity and there was deleveraging," said Chief Financial Officer Sharon Yeshaya, adding that clients continued to be active. "We have not seen, so far, signs of market dysfunction."

Potential for a recession and uncertainty over the Federal Reserve's interest-rate trajectory have kept investors on edge.

Equity trading revenue rose as investors rebalanced their portfolios, boosting volumes, mainly in technology and industrial stocks.

Fixed income trading revenue increased, as renewed concerns about stagflation due to tariffs led investors to hedge aggressively and change the types of bonds they held, and over what periods.

Morgan Stanley's total revenue rose to $17.7 billion in the first quarter, compared with $15.1 billion a year ago.

Wall Street's investment banks face a murky dealmaking climate, as trade tensions rattle markets and delay transactions.

A rebound in Asia helped lift global M&A volumes in the first quarter, but U.S. activity — a key revenue driver for firms like Morgan Stanley — slumped 13% amid growing uncertainty, according to Dealogic data.

"The volatility has an impact on strategic activity. We had the largest pipeline in years but that is taking longer to materialize. Companies' boards became more cautious," Yeshaya added.

The CFO said companies are not cancelling deals, just delaying them. Morgan Stanley's investment banking revenue rose 8% from a year ago, with higher advisory and fixed income underwriting revenue.

Equity underwriting revenues fell as issuers and investors considered market uncertainty.

Bankers and analysts warn the prolonged trade war, disappointing IPO debuts and weak follow-through on major deals could dampen investor sentiment and advisory pipelines in the second quarter.