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Will Trading Weakness Impact Goldman’s (GS) Q3 Earnings?


Expected slump in trading business is likely to adversely affect The Goldman Sachs Group, Inc.’s GS third-quarter earnings, to be reported on Oct 17. Moreover, the bank is anticipated to record year-over-year decline in earnings and revenues.

Goldman’s second-quarter 2017 results recorded a positive earnings surprise of 17.6%, driven by higher equities revenues and low expenses. However, lower fixed income revenues thwarted the bottom line. Notably, the quarter witnessed challenging market-making environment, reduced levels of volatility and low client activity levels.

This earnings beat translated into impressive price movement for the company. During the three-month period ended Sep 30, shares of Goldman gained 6.9%.

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

Earnings Whispers

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 2 (Buy) or at least 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 $4.31. 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 #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

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 Q3 Results

Market Volatility: Being an investment bank, Goldman is exposed to extreme market volatility. Therefore, the company is likely to be affected by the subdued volatility experienced during the quarter.

Top-line Pressure: Reduction in equity issuance and feeble equity trading volumes are expected to negatively influence fee revenue growth this time around. Nevertheless, persistent rise in debt underwriting (mainly on assumption of continuous increase in interest rates) will likely provide some respite. Though continued momentum in investment banking business is likely to support the bottom-line numbers, Goldman might remain under pressure due to lackluster fixed-income trading activities on low volatility during the to-be-reported quarter.

Per the Thomson Reuters data, the total deal value of announced M&As globally increased during the quarter. Notably, in the third quarter, Goldman acted as an advisor and helped closed M&A deals worth over $300 billion. Therefore, M&A advisory fees for the bank are expected to lend support to revenues.

Notably, the Zacks Consensus Estimate for sales is projected at $7.64 billion, down 6.5% year over year.

Rise in Net Interest Income: In addition to elevated interest rates, a moderate improvement in lending — particularly, in the areas of commercial and industrial, as well as consumer — might perk up interest income.

Strong Expense Management: Goldman completed an expense initiative during the first half of 2016 which translated into run-rate expense savings of around $1.6 billion in 2016. The bank 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 slightly to $4.31, 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 is slated to release results on Oct 17. The company has an Earnings ESP of +0.23% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for U.S. Bancorp USB is +0.26%. The bank also carries a Zacks Rank of 3 and is scheduled to report quarterly numbers on Oct 18.

State Street Corporation STT has an Earnings ESP of +0.27% and carries a Zacks Rank of 2. It is slated to report results on Oct 23.

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