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Rise in Trading Activities to Aid Goldman's (GS) Q4 Earnings

Zacks Equity Research

Rise in client activities is likely to have aided Goldman Sachs’ GS fourth-quarter 2019 earnings, slated for release on Jan 15. Uncertainty related to the U.S.-China trade war and Brexit, expectations of global economic slowdown, the Federal Reserve’s accommodative stance and a number of activities in the latter part of the quarter, along with strong domestic economy, kept tickling trading counters.

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

Other Factors at Play

Soft Investment Banking Fees: Trade concerns and fears of global economic slowdown hurt investment banking revenues in 2019. While dealmakers across the globe were active during the fourth quarter, M&A deal value and volume witnessed a fall due to several geopolitical concerns as the companies became more risk-averse. Therefore, this might have had an adverse impact on Goldman’s advisory fees.

Equity markets performance and the central banks’ accommodative stance drove corporates to issue equities across the globe. Further, bond issuance volumes were strong, while debt issuances were muted as loan demand was soft. Hence, Goldman’s equity underwriting fees and debt origination fees (accounting for almost 55% of total investment banking fees) might have been affected, with its commendable position in the market likely to have offered some respite.

Muted Net Interest Income Growth: Low interest rates during the October-December quarter might have dampened banks’ net interest margin. Also, per the Fed’s latest data, rise in loans may have remained low during the period. Particularly, weakness in revolving home equity loans and commercial and industrial (C&I) are expected to have offset growth in consumer and commercial real estate loans. Also, trade-war concerns, though subsided to an extent, have hurt business sentiments across the industries, which might had an adverse impact on loan demand.

Therefore, a soft lending scenario is predicted to have curtailed growth in net interest income to an extent.

Prudent 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 is unlikely to have provided much support. Additionally, there were no major outflows related to legal settlements during the December-end quarter that might have impacted Goldman’s earnings unusually.

Here is what our quantitative model predicts:

Goldman has 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 +1.34%.

Zacks Rank: Goldman currently carries a Zacks Rank of 3, which increases the predictive power of ESP.

The Zacks Consensus Estimate for earnings of $5.18 reflects a 14.2% decline on a year-over-year basis. The Zacks Consensus Estimate for sales of $8.6 billion indicates 5.9% increase 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


Other 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.

The PNC Financial Services Group, Inc PNC is set to report earnings on Jan 15. The company has an Earnings ESP of +0.36% and carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Bank of America Corporation BAC is +0.13% and the stock carries a Zacks Rank of 2. The company is scheduled to release quarterly figures on Jan 15.

State Street Corporation STT has an Earnings ESP of +0.29% and sports a Zacks Rank of 1. It is slated to report results on Jan 17.

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