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Will Muted Trading Business Impact Goldman (GS) Q2 Earnings?

Zacks

Muted trading business is unlikely to support Goldman SachsGS second-quarter 2018 earnings, to be reported on Jul 17. However, benefits of higher rates and relatively better performance of other segments — mainly investing and lending — are anticipated to aid earnings.

Being an investment bank, Goldman is exposed to extreme market volatility. Volatility-driven growth in trading revenues, which supported the top line during the January-March quarter, is likely to have remained muted in the second quarter. Though uncertainty, mainly related to the U.S.-China trade war and some other geo-political tensions, induced volatility, client activity returned to normalized levels in the April-June quarter. Therefore, not much support is expected from this source of revenues as fixed income business is likely to have slowed down during the period.

The Zacks Consensus Estimate for the Institutional Client Services division, of which the major portion comprises fixed income revenues, reflects a decline of 18.2% sequentially.

Additionally, the investment management unit of Goldman is projected to have supported earnings. Prior investments in fixed income, alternatives and low-cost index funds are expected to continue to reap benefits to some extent. Notably, the Zacks Consensus Estimate for this division projects a rise of 6.7% year over year.

Here are the other factors that might influence Goldman’s Q2 results:

Investment Banking Fees to Report Modest Results: The trend of earning solid advisory and underwriting fees for debt and equity issuance is unlikely to have remained in the second quarter, as rising rates will have limited corporates’ involvement in these activities. As debt origination fees typically account for about half of total investment banking fees, this might have adversely impacted Goldman’s revenues.

However, a potential rise in fees from increasing M&As will likely help banks partially offset the lost revenues. Also, strong equity issuances globally might have boosted IPOs and follow-on offerings. So, the related fees are predicted to increase. Thus, Goldman is also likely to report a decent quarter.

Notably, the Zacks Consensus Estimate for the investment banking segment is pegged at $1.8 billion, up 5.9% year over year.

Investing & Lending to Get a Boost: Improved corporate performance and rising rates are expected to have driven revenues from this source. In addition to higher interest rates, a moderate improvement in lending — particularly in the areas of commercial and industrial, and consumer — is anticipated to have perked up revenues. Nonetheless, lower asset values recorded during the quarter might have partially offset this rise. Notably, the Zacks Consensus Estimate for investing and lending segment is projected at $1.7 billion, up 6.3% year over year.

Strong Expense Management: Goldman is focused on enhancing its efficiency while maintaining strong franchise and investing in new opportunities. As the majority of unnecessary expenses have already been cut by the bank, expense reduction will unlikely be a major support. Furthermore, there were no major outflows related to legal settlements during the quarter that might have impacted Goldman’s earnings unusually.

Here is what our quantitative model predicts:

Goldman does not have the right combination of two key ingredients — a positive Earnings ESP and a 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.

Zacks ESP: The Earnings ESP for Goldman is 0.00%.

Zacks Rank: Goldman carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

The Zacks Consensus Estimate for earnings of $4.67 reflects an 18.2% rise on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $8.7 billion indicates 10.4% increase from the prior-year quarter.

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.

Comerica CMA is slated to release results on Jul 17. The company has an Earnings ESP of +1.6% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for BB&T Corporation BBT is +0.17% and the stock carries a Zacks Rank of 3. The company is scheduled to release results on Jul 19.

Cullen/Frost Bankers, Inc. CFR has an Earnings ESP of +0.56% and holds a Zacks Rank of 3. It is slated to report results on Jul 26.

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