Soft Trading Activities To Hurt Goldman's (GS) Q2 Earnings

Muted trading business is unlikely to support Goldman Sachs’ (NYSE:GS) second-quarter 2019 earnings, slated for release on Jul 16. On the trading front, performance of capital markets might be a matter of concern.

Despite strong equity markets and improved performance of Treasury bonds, low volumes and reduced client activity were witnessed in the to-be-reported quarter, partly on the moderating U.S. economic growth, along with uncertainty about the global trade regime and other lingering economic uncertainties.

The Zacks Consensus Estimate for the Institutional Client Services division, of which the major portion comprises fixed income revenues, reflects a decline of 1.4% year over year.

However, Goldman’s investment management unit is projected to support earnings in the quarter. Prior investments in fixed income, alternatives and low-cost index funds may keep reaping benefits to some extent. Notably, the Zacks Consensus Estimate for this division projects 8.7% year-over-year jump in revenues.

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

Investment Banking Fees to Disappoint: The Fed’s dovish monetary policy and decent equity markets performance are likely to aid equity issuance globally. However, relatively higher rates and several geopolitical concerns adversely impacted debt issuances in the to-be-reported quarter. Hence, Goldman’s equity underwriting fees and debt origination fees (accounting for almost 55% of total investment banking fees) will likely be affected, while its commendable position in the market may offer some respite.

Further, while dealmakers across the globe were active during the second quarter, global deal value and volume declined on higher borrowing costs and several geopolitical concerns. So, Goldman’s advisory fees will be adversely impacted.

Notably, the Zacks Consensus Estimate for the investment banking segment is pegged at $1.89 billion, down 7.4% year over year.

Investing & Lending to Get a Boost: Improved corporate performance is expected to drive revenues from this source. A decent lending backdrop, particularly in the areas of consumer will offer support to interest income, while weakness in revolving home equity loans, commercial and industrial along with commercial real estate will partially offset this. Moreover, higher asset values recorded during the quarter might have complemented this rise. Notably, the Zacks Consensus Estimate for the investing and lending segment is projected at $1.95 billion, slightly up year over year.

Strong Expense Management: Goldman is focused on enhancing its efficiency, while maintaining a 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. Additionally, 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 the 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 -2.43%.

Zacks Rank: Goldman currently carries a Zacks Rank of 3, which increases the predictive power of ESP. But we need to have positive earnings ESP to be sure of earnings beat.

The Zacks Consensus Estimate for earnings of $4.82 reflects a 19.4% decline on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $8.7 billion indicates 7.9% decrease 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 (NYSE:CMA) is slated to release results on Jul 17. The company has an Earnings ESP of +0.81% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M&T Bank Corp. (NYSE:MTB) is scheduled to report earnings figures on Jul 18. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.20%.

The Earnings ESP for SunTrust Banks, Inc. (NYSE:STI) is +0.93% and it carries a Zacks Rank of 3, currently. The company is set to report quarterly numbers on Jul 18.

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