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Muted Trading Activities to Hurt Goldman's (GS) Q3 Earnings

Zacks Equity Research

Muted trading business is unlikely to have supported Goldman Sachs’ GS third-quarter 2019 earnings, slated for release on Oct 15. On the trading front, performance of capital markets might be a matter of concern. Despite strong equity markets and elevated volumes, reduced client activity were witnessed in the to-be-reported quarter, partly on the political uncertainty and continued ambiguity over trade conflict, along with several other geopolitical matters.

However, Goldman’s investment management unit is projected to have supported earnings in the quarter. Prior investments in fixed income, alternatives and low-cost index funds may keep reaping benefits to some extent.

Here are the other factors that might influence Goldman’s Q3 results:

Investment Banking Fees to Disappoint: Despite decent equity market performance, equity issuance is likely to have been weak globally. Yet, lower rates might aid debt issuances to some extent in the third quarter. Hence, Goldman’s equity underwriting fees and debt origination fees (accounting for almost 55% of total investment banking fees) will likely be affected, while its commendable position in the market may offer some respite.

Further, the U.S.-China trade war concerns have led to a decline in global economic growth, affecting deal volume. Moreover, marginal increase in consumer spending and subdued business investments amid trade tensions hit the M&A and IPO activities. So, Goldman’s advisory fees will be adversely impacted.

Investing & Lending to Get a Boost: Improved corporate performance is expected to have drive revenues from this source. A decent lending backdrop, particularly in the areas of consumer will offer support to interest income, while weakness in revolving home equity loans, commercial and industrial, along with commercial real estate, will partially offset this. In addition, higher asset values recorded during the quarter might have complemented this growth.

Strong Expense Management: Goldman is focused on enhancing its efficiency, while maintaining a 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 September-end quarter that might impact Goldman’s earnings unusually.

Here is what our quantitative model predicts:

Goldman does not have the right combination of the 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 -2.47%.

Zacks Rank: Goldman currently carries a Zacks Rank of 3, which increases the predictive power of ESP. But we need to have positive earnings ESP to be sure of an earnings beat.

The Zacks Consensus Estimate for earnings of $5.03 reflects a 19.9% decline on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $8.6 billion indicates 1.1% decrease from the prior-year quarter.

The Goldman Sachs Group, Inc. Price and EPS Surprise

The Goldman Sachs Group, Inc. Price and EPS Surprise

The Goldman Sachs Group, Inc. price-eps-surprise | The Goldman Sachs Group, Inc. Quote

Stocks That Warrant a Look

Here are some 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.

Citigroup C is slated to release results on Oct 15. The company has an Earnings ESP of +0.51% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M&T Bank Corporation MTB is scheduled to report earnings figures on Oct 17. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.72%.

The Earnings ESP for Wells Fargo & Company WFC is +5.79% and it carries a Zacks Rank of 3, currently. The company is set to report quarterly numbers on Oct 15.

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