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Will Muted Trading Revenues Hurt Goldman's (GS) Q1 Earnings?

Zacks Equity Research

Muted trading business is unlikely to support Goldman Sachs’ GS first-quarter 2019 earnings, slated for release on Apr 15. On the trading front, performance of capital markets might be a matter of concern. Despite strong equity markets and a rise in Treasury bonds, low volumes and reduced client activity were witnessed in the to-be-reported quarter, partly on the U.S. government shutdown and other lingering economic uncertainties.

The Zacks Consensus Estimate for the Institutional Client Services division, of which the major portion comprises fixed income revenues, reflects a rise of 2.2% year over year.

However, the investment management unit of Goldman 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. Notably, the Zacks Consensus Estimate for this division projects stable revenues.

Here are the other factors that might influence Goldman’s Q1 results:

Investment Banking Fees to Disappoint: The Fed’s dovish monetary policy, ongoing political and economic issues related to Brexit, concerns related to unsolved U.S.-China trade deal negotiations, the U.S. government shutdown and expectation of global economic slowdown hampered investment banking activities in the Mar-end quarter. Hence, Goldman’s equity underwriting fees and debt origination fees (accounting for almost 55% of total investment banking fees) are expected to be adversely impacted, while its commendable position in the market may offer some respite.

While dealmakers across the globe were active during the first quarter, global deal value and volume declined on higher borrowing costs and several geopolitical concerns. So, Goldman’s advisory fees will be adversely impacted.

Notably, the Zacks Consensus Estimate for the investment banking segment is pegged at $1.7 billion, down 5.6% year over year.

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. Moreover, higher asset values recorded during the quarter might have complemented this rise. Notably, the Zacks Consensus Estimate for the investing and lending segment is projected at $1.8 billion, down 14.3% year over year.

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 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 0.00%.

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

The Zacks Consensus Estimate for earnings of $5.05 reflects a 27.3% decline on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $9 billion indicates 10.7% 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. Quote

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.

Comerica CMA is slated to release results on Apr 16. The company has an Earnings ESP of +0.52% 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 Bank of New York Mellon Corporation BK is scheduled to report earnings figures on Apr 17. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.63%.

The Earnings ESP for BankUnited, Inc. BKU is +1.89% and it carries a Zacks Rank of 3, currently. The company is set to report quarterly numbers on Apr 24.

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