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Will Goldman (GS) Q4 Earnings Beat on Market Volatility?

Zacks

We expect The Goldman Sachs Group, Inc. GS to beat earnings expectations when it reports fourth-quarter 2016 results, before the opening bell on Jan 18.

Why a Likely Positive Surprise?

Our proven model shows that Goldman has the right combination of two key ingredients to beat earnings.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is pegged at +2.33%. This is a very significant and leading indicator of a likely positive earnings surprise for the company. You can uncover the best stocks to buy or sell before they’re reported, with our Earnings ESP Filter.

Zacks Rank #1 (Strong Buy): Note that stocks with a Zacks Ranks #1, 2 (Buy) and 3 (Hold) have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

The combination of Goldman’s Zacks Rank #1 and ESP of +2.33% makes us confident of an earnings beat.

Further, the company boasts an impressive earnings surprise history as depicted in the chart below:

Shares of Goldman gained 53.4% over the past one year, outperforming the Zacks categorized Investment Bank industry’s 46.6% growth.

Factors to Influence Q4 Results

Market Volatility: Being an investment bank, Goldman is exposed to extreme market volatility. Therefore, the company is likely to be affected by the persistent market swings being experienced since the beginning of 2016.

Top-line Growth: Trading revenues are anticipated to continue rising on the back of strength in fixed income and currencies. Further, post-election volatility is estimated to lead to a marginal improvement in equity trading as well.

Apart from this, an increase in investment banking fees attributable to robust M&A activity and increase in debt underwriting is foreseen. Also, overall loan demand is predicted to be strong on the back of an improving economy.

Pressure on Net Interest Margin to Ease Slightly: Rise in the 10-year Treasury yield, since Nov 8, 2016, is expected to alleviate pressure on net interest margin (NIM) to some extent. However, the favorable impact on NIM is not likely to occur in the quarter.

Strong Expense Management: Goldman completed an expense initiative during the first half of 2016, which translated into run-rate expense savings of around $700 million. The company is focused on improving its efficiency, while maintaining strong franchise and investing in new opportunities. Therefore, continuation of expense management is likely to aid bottom-line expansion.

Notably, this banking giant was inadequate to win analysts’ confidence during the quarter. The Zacks Consensus Estimate edged down roughly 1% to $4.73 over the last seven days.

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.

KeyCorp KEY has an earnings ESP of +6.90% and a Zacks Rank #2. It is scheduled to report fourth-quarter 2016 results on Jan 19. You can see the complete list of today’s Zacks #1 Rank stocks here.

The earnings ESP for Citigroup Inc. C is +1.79% and it carries a Zacks Rank #2. The company is expected to release fourth-quarter results on Jan 18.

Fifth Third Bancorp FITB has an earnings ESP of +2.33% and a Zacks Rank #2. It is slated to report fourth-quarter results on Jan 24.

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