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Muted Trading Revenues to Hurt Goldman's (GS) Q4 Earnings?

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Muted trading business is unlikely to support Goldman Sachs’ (GS - Free Report) fourth-quarter 2018 earnings, slated to be reported on Jan 16. On the trading front, performance of capital markets might be a matter of concern. Though escalating trade-war concerns, Brexit issues, anxiety on rising rates and some other geo-political tensions during the quarter created high volatility, seasonality on a sequential basis might be an offsetting factor.

The Zacks Consensus Estimate for the Institutional Client Services division, of which the major portion comprises fixed income revenues, reflects a decline of 16.1% sequentially.

However, the investment management unit of Goldman is projected to have supported earnings in the quarter to be reported. Prior investments in fixed income, alternatives and low-cost index funds may continue to reap benefits to some extent. Notably, the Zacks Consensus Estimate for this division projects a 12.5% sequential rise.

Here are the other factors that might influence Goldman’s Q4 results:

Investment Banking Fees to Disappoint: Investment banking is anticipated to display a disappointing performance for the to-be-reported quarter due to seasonality, as well as a considerable reduction in equity underwriting volumes globally on escalating trade-war fears. A fall in equity issuances across the globe might have resulted from reduced IPOs and follow-on offerings. Therefore, equity underwriting fees are projected to have declined.

Moreover, debt origination fees will likely have remained low due to rising rates curbing corporates’ involvement in these activities. Furthermore, robust pipeline of M&As in the previous quarters lost momentum in the fourth quarter on volatile stock markets and higher borrowing costs. However, advisory revenues are expected to be on upswing on escalated volume of closed deals in the fourth quarter.

Notably, the Zacks Consensus Estimate for the investment banking segment is pegged at $2 billion, slightly up sequentially.

Investing & Lending to Get a Boost: Improved corporate performance and rising rates are expected to have driven revenues from this source. In addition to higher interest rates, a decent lending backdrop, particularly in the areas of commercial and industrial, commercial real estate and consumer will offer support to interest income, while weakness in revolving home equity loans (due to slowdown in originations as well as refinancing activities) will partially offset this. Nonetheless, lower asset values recorded during the quarter might have partially offset this rise. Notably, the Zacks Consensus Estimate for the investing and lending segment is projected at $1.8 billion, down 5.3% sequentially.

Strong Expense Management: Goldman is focused on enhancing its efficiency while maintaining strong franchise and investing in new opportunities. As the majority of unnecessary expenses have already been slashed by the bank, expense reduction will unlikely be a major support. Additionally, there were no major outflows related to legal settlements during the quarter that might impact Goldman’s earnings unusually.

Here is what our quantitative model predicts:

Goldman does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Goldman is -7.36%.

Zacks Rank: Goldman currently carries a Zacks Rank #4, which further decreases the predictive power of ESP.

The Zacks Consensus Estimate for earnings of $5.50 reflects a 3.2% decline on a year-over-year basis. However, the Zacks Consensus Estimate for sales of $7.9 billion indicates 0.9% increase from the prior-year quarter.

Stocks That Warrant a Look

Here are some other stocks you may want to consider, as according to our model these have the right combination of elements to post an earnings beat this quarter.

U.S. Bancorp (USB - Free Report) is slated to release results on Jan 16. The company has an Earnings ESP of +0.26% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for M&T Bank (MTB - Free Report) is +0.80% and the stock carries a Zacks Rank of 3, at present. The company is scheduled to release results on Jan 17.

BB&T Corporation (BBT - Free Report) has an Earnings ESP of +0.32% and carries a Zacks Rank of 3, currently. It is slated to report results on Jan 17.

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