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Trading to Aid Goldman's (GS) Q2 Earnings, Low IB to Hurt

·5 min read

The Goldman Sachs Group, Inc. GS is slated to release second-quarter 2022 earnings on Jul 18, before market open. The company is expected to have witnessed year-over-year declines in revenues and earnings.

In the previous quarter, Goldman’s earnings per share of $10.76 surpassed the Zacks Consensus Estimate of $8.61. While strength in Fixed Income, Currency and Commodities (FICC), wealth management, and consumer banking businesses acted as a tailwind, the company’s results were hurt by lower debt and equity underwriting revenues.

Over the trailing four quarters, the company’s earnings surpassed the consensus estimate on three of the four occasions and missed on the other, the surprise being 29.7%, on average.

The Goldman Sachs Group, Inc. Price and EPS Surprise


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

Factors at Play

Global Markets’ Revenues: The developments of the first quarter of 2022, including Russia’s invasion of Ukraine, continued to disrupt supply chains and lead to ambiguity across the globe in the June-end quarter, leading to significant market volatilities. Also, fears of an economic slowdown, high inflation and rising interest rates globally led to an increase in client activity and trading volume in the second quarter. Thus, FICC and equity trading are likely to have been decent in the second quarter.

Amid the backdrop, the Zacks Consensus Estimate of $5.06 billion for GS’s net revenues in the Global Markets segment suggests a 3.3% rise from the prior-year quarter’s reported number.

Investment Banking (IB) Fees: Deal-flow considerably dried in second-quarter 2022 due to fewer companies going public and stock price declines limiting equity deals. Also, a fall in investment banking activity due to subdued capital markets and a decline in debt issuance deal volume were seen. High market volatility, triggered by the Ukraine crisis, and uncertainty regarding an economic slowdown tied to inflation have continued to delay the finalization of dealsin the June-end quarter.

While Goldman’s leading position in announced and completed mergers and acquisitions is expected to have aided the company in recording related fees, low equity and bond volumes are anticipated to have hindered over fees. The consensus estimate for IB fees of $2.37 billion indicates a 34% year-over-year decline.

Net Interest Income (NII): Per the Fed’s latest data, loan demand, particularly commercial real estate loans, credit card loans, and commercial and industrial loans, has been encouraging in April and May. Hence, the company’s loan balances are likely to have improved in the second quarter.

The positive impacts of the rate hikes — 25 basis points (bps) in March, 50 bps in May and 75 bps in June — and lower funding expenses are likely to get reflected in the company NII and margins in the second quarter.

Asset Management Business: Amid the macroeconomic uncertainty and geopolitical fears, along with market declines and unfavorable credit spreads, Goldman’s asset management business is expected to have witnessed outflows in the quarter. Amid the market pullback, the consensus estimate for the company’s asset management revenues of $1.79 billion suggests a significant decline from the prior-year quarter’s reported number of $5.13 billion.

Expenses: Goldman’s investments in technology are anticipated to have led to a rise in costs in the to-be-reported quarter. Also, a rise in transaction-based expenses is expected to have occurred due to higher client activity.

Goldman’s Inorganic Moves in Q2

In April, Goldman closed the previously announced acquisition of NN Investment from NN Group N.V. in a €1.7-billion all-cash transaction to bolster its Europe distribution and fund management capabilities.

The buyout boosts Goldman’s assets under supervision to $2.8 trillion. This is also in line with the company’s aim to expand its Europe business. It increases assets under supervision in Europe to more than $600 billion.

Here is what our quantitative model predicts:

Our proven model does not show that Goldman has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat this time around.

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 -9.56%.

Zacks Rank: It currently carries a Zacks Rank #3 (Hold).

Prior to the second-quarter earnings release, Goldman’s quarterly activities were inadequate to gain adequate analyst confidence. Notably, the Zacks Consensus Estimate for second-quarter earnings has been revised marginally downward to $7.45 over the past week. It suggests a 50.4% year-over-year fall.

Also, the consensus estimate of $11.3 billion for quarterly revenues indicates a 26.4% fall from the prior-year quarter’s reported number.

Stocks That Warrant a Look

Here are a few stocks that you might want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

The Earnings ESP for Truist Financial TFC is +1.38% and it carries a Zacks Rank #3 at present. The company is slated to report second-quarter 2022 results on Jul 19.

Over the past 30 days, the Zacks Consensus Estimate for TFC’s quarterly earnings has been unchanged.

Associated Banc-Corp ASB is scheduled to release second-quarter 2022 earnings on Jul 21. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +1.14%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ASB’s quarterly earnings estimates have been unchanged over the past month.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
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