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Subdued Trading Business to Hurt Goldman (GS) Q3 Earnings?


Muted trading business is unlikely to support Goldman SachsGS third-quarter 2018 earnings, to be reported on Oct 16. After an impressive first-half 2018 performance driven by significant volatility, client activity remained low in the third quarter. Therefore, trading revenues are feared to have been negatively impacted.

Being an investment bank, Goldman is exposed to extreme market volatility. Though higher inflation expectation, tightening of monetary policy by the Fed, the U.S.-China trade war and a sharp sell-off in the tech sector induced volatility in the first half of the year, uncertainty mainly related to the rising trade-war fears and some other geo-political tensions in the Sep-end quarter failed to significantly boost client activity. Therefore, not much support is expected from this source of revenues.

The Zacks Consensus Estimate for the Institutional Client Services division, of which the major portion comprises fixed income revenues, reflects a decline of 12.5% sequentially.

However, the investment management unit of Goldman is projected to have supported earnings in the quarter to be reported. Prior investments in fixed income, alternatives and low-cost index funds may continue to reap benefits to some extent. Notably, the Zacks Consensus Estimate for this division projects a slight sequential rise.

Here are the other factors that might influence Goldman’s Q3 results:

Investment Banking Fees to Disappoint: Investment banking is anticipated to display a disappointing performance for the to-be-reported quarter due to seasonality, as well as a considerable reduction in equity underwriting volumes globally on trade-war fears. A fall in equity issuances across the globe might have resulted from reduced IPOs and follow-on offerings. Therefore, equity underwriting fees are projected to have declined slightly.

Moreover, debt origination fees will likely have remained low due to rising rates curbing corporates’ involvement in these activities. However, strong pipeline of M&As in the previous quarters might have offset slowdown of these activities in the quarter to some extent and aided advisory business.

Notably, the Zacks Consensus Estimate for the investment banking segment is pegged at $1.8 billion, down marginally sequentially.

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 the investing and lending segment is projected at $1.9 billion, up 11.8% 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 slashed 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 impact 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 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.

Earnings ESP: The Earnings ESP for Goldman is -2.31%.

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 $5.42 reflects an 8% rise on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $8.4 billion indicates 0.6% 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 Oct 16. The company has an Earnings ESP of +0.49% 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 M&T Bank MTB is +0.41% and the stock carries a Zacks Rank of 3. The company is scheduled to release results on Oct 17.

State Street Corporation STT has an Earnings ESP of +0.13% and carries a Zacks Rank of 3. It is slated to report earnings on Oct 19.

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