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Will Bleak Trading Revenue Hurt Goldman’s (GS) Q2 Earnings?

Zacks

The Goldman Sachs Group, Inc. GS is scheduled to report second-quarter 2017 results on Jul 18.

Hurt by higher expenses, Goldman’s first-quarter 2017 results recorded a negative earnings surprise of 4.3%. Further, the bottom line witnessed significant deterioration on a year-over-year basis. Results were primarily affected by lower equities revenues. However, higher underwriting fees were a tailwind. Notably, the quarter witnessed political uncertainty, reduced levels of volatility and low client activity levels.

This earnings miss translated into deteriorating price movement for the company. Over the last six months, shares of Goldman declined 5.7%.

Will the decline in stock price continue post second-quarter earnings release? It majorly depends on whether the firm is able to beat on earnings this time. Notably, Goldman has recorded positive earnings surprise in three of the last four trailing quarters.

Our quantitative model doesn’t call for an earnings beat this time around. A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing the odds of an earnings beat.

Unfortunately, this is not the case here, as elaborated below:

Zacks ESP: The Earnings ESP for Goldman is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are currently pegged at $3.51. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Goldman’s Zacks Rank #4 (Sell) further lowers the predictive power of ESP. It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors to Influence Q2 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 experienced during the quarter.

Top-line Headwinds: Trading revenues are expected to decrease year over year, mainly due to low volatility in both the bond and equity markets. The prior-year quarter’s trading results were quite unusual across the industry, with Brexit being the main driver. Apart from this, the global M&A activity remained dismal. Per the Thomson Reuters data, the total deal value of announced M&As globally fell during the quarter. Debt underwriting was soft as well. Also, overall investment banking income is likely to witness a decline, however improvement in equity underwriting is anticipated.

Pressure on Net Interest Margin (NIM) Might Ease: The prolonged low-rate environment has been taking a toll on the bank’s margins for the past several years. However, the Fed’s recent rate hike for the fourth time, since the financial crisis, and its commitment to raise rates faster (one more time) this year, based on a convincing pace of economic growth, is likely to help banks get rid of shrinking margins. However, lower treasury yields during the quarter might curb margin improvement.

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. Further, the company continued those efforts in the second half of 2016 and generated nearly $900 million of run-rate savings. It is focused on enhancing its efficiency while maintaining strong franchise and investing in new opportunities. Thus, continuation of expense management is likely to aid bottom-line expansion in the coming quarters.

Notably, this banking giant’s performance was inadequate to win analysts’ confidence during the quarter. The Zacks Consensus Estimate decreased 5.4% to $3.51, over the last seven days.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as according to our model they have the right combination of elements to post an earnings beat this quarter.

Comerica Incorporated CMA has an earnings ESP of +4.67% and a Zacks Rank #2. It is scheduled to report second-quarter 2017 results on Jul 18. You can see the complete list of today’s Zacks #1 Rank stocks here.

The earnings ESP for Fifth Third Bancorp FITB is +2.38% and it carries a Zacks Rank #3. The company is scheduled to release second-quarter results on Jul 21.

Huntington Bancshares Incorporated HBAN has an earnings ESP of +4.35% and a Zacks Rank #3. It is slated to report second-quarter results on Jul 21.

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