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How to Play Goldman Sachs Stock Ahead of Its Q3 Earnings Release?
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The Goldman Sachs Group, Inc. (GS - Free Report) is scheduled to release third-quarter 2024 earnings on Oct. 15, before the opening bell.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
In second-quarter 2024, Goldman's results benefited from the strength in investment banking (IB) business and higher revenues in Commodities Client Execution (FICC) financing, along with a rise in equities revenues. Also, lower expenses and provisions acted as tailwinds.
Goldman has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an average earnings surprise of 24.38%.
Earnings Surprise History
Image Source: Zacks Investment Research
Let us see how Godman is expected to fare in terms of revenues and earnings this time.
The Zacks Consensus Estimate for revenues is pegged at $11.76 billion, calling for a 0.5% decline from the year-ago quarter's reported figure. At the 2024 Barclays Global Financial Services Conference in early September, Goldman’s CEO, David Solomon, highlighted Goldman's consistent efforts to narrow its focus on the consumer business. He stated that by unloading the GM Card business and a separate portfolio of loans, the bank’s revenues would take a hit in the third quarter. He added, “The combination of those things this quarter will likely have an approximately $400 million pre-tax impact, largely showing up in revenues."
In the past month, the consensus estimate for quarterly earnings has been revised 16.8% downward to $6.96. The projection suggests a rally of 30.7% from the year-ago quarter's reported figure.
Estimate Revision Trend
Image Source: Zacks Investment Research
Factors to Shape GS’ Q3 Results
Market-Making Revenues: Client activity and market volatility were decent in the third quarter. The likelihood of a soft landing of the U.S. economy, cooling inflation and easing monetary policy drove client activity. Volatility was decent in equity markets and other asset classes, including commodities, bonds and foreign exchange.
At the Barclays Conference Solomon also stated that trading revenues will probably slide 10% in the third quarter of 2024 owing to a tough year-over-year comparison and difficult trading conditions in August for fixed-income markets.
The Zacks Consensus Estimates for market-making revenues is pegged at $4.97 billion, indicating a marginal increase from the prior-year quarter’s tally.
IB Fees: Global mergers and acquisitions (M&As) in the third quarter of 2024 showed marked improvement after subdued 2023 and 2022. Deal value and volume were favorable during the quarter, driven by solid financial performance, higher chances of a soft landing of the U.S. economy, buoyant markets and interest rate cuts. Yet, tough scrutiny by antitrust regulators and lingering geopolitical issues were headwinds.
The IPO market witnessed signs of cautious optimism, given the market volatility, geopolitical challenges and global monetary easing. The remarkable equity market performance drove some solid activity in follow-up equity issuances. Further, bond issuance volume improved on favorable economic conditions and corporate spreads at near historical lows.
GS’ leadership position in worldwide announced and completed M&As, equity and equity-related offerings and common stock offerings, is likely to have provided it an edge over its peers. These factors are likely to have favorably impacted the company’s quarterly IB revenues.
The Zacks Consensus Estimate for IB fees of $1.65 billion indicates 6.1% growth from the prior-year quarter’s levels.
Net Interest Income (NII): On Sept. 18, the Federal Reserve cut the interest rates by 50 basis points to 4.75-5% for the first time since March 2020. The development is not expected to have much impact on Goldman’s NII during the third quarter. Also, relatively higher rates might have hurt NII growth prospects because of elevated funding/deposit costs and an inverted yield curve during the major part of the quarter.
The clarity on the rate cut path and the stabilizing macroeconomic backdrop are likely to have provided support to the lending scenario. Per the Fed’s latest data, the demand for loans, especially commercial and industrial loans was modest in the first two months of the quarter. Hence, loan growth for Goldman is likely to have been decent.
The Zacks Consensus Estimate for NII’s revenues is pegged at $1.82 billion, suggesting a 17.8% rise.
Expenses: Goldman’s investments in technology and market development expenses for business expansion and a rise in transaction-based expenses due to higher client activity are anticipated to have led to a rise in expenses in the to-be-reported quarter.
What Our Model Unveils for Goldman
Our proven model does not conclusively predict an earnings beat for Goldman Sachs this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Goldman outperformed the S&P 500 index in the first nine months of 2024. Some other major finance sector stocks that outperformed the index include Citigroup (C - Free Report) and JPMorgan (JPM - Free Report) .
Price Performance
Image Source: Zacks Investment Research
JPM is slated to announce its quarterly numbers on Oct. 11, while C will release the same on Oct. 15.
Let’s look at the value Goldman Sachs offers investors at current levels.
Currently, GS is trading at 12.42X forward 12 months earnings, above its five-year median of 9.82X. Meanwhile, the industry’s forward earnings multiple sits at 10.49X. The company’s valuation looks somewhat stretched compared with its range and the industry average.
Price-to-Earnings (forward 12 Months)
Image Source: Zacks Investment Research
Goldman’s Investment Thesis
Goldman is well-positioned for future growth on the back of its focus on core operations, opportunistic buyouts and improving demand in global deal-making. The firm is actively engaged in strategic initiatives, which will boost its IB and trading businesses.
GS came out as a winner after challenging the Fed to reduce its capital requirements over its 2024 stress test result, which initially forced this Wall Street investment bank to hold a higher amount of capital.
The central bank lowered the extra capital level requirement of Goldman Sachs. The bank now must hold a stress capital buffer of 6.2%, down from the 6.4% suggested initially. With this, GS will be required to hold common equity equal to 13.7% of its risk-weighted assets instead of the 13.9% the Fed initially advised.
As its capital requirement lowers, the bank can utilize this to increase capital distributions and buyback plans.
The company continues to reward shareholders handsomely. In July 2024, Goldman’s board of directors approved a 9.1% increase in the common stock dividend to $3 per share. In the past five years, the company hiked dividends four times with an annualized growth rate of 24.80%. Currently, its payout ratio sits at 35% of earnings.
Mounting expenses due to investment in technology and business expansion will limit the company’s growth.
Final Thoughts on Goldman
Decent client activity, improving lending scenario and the solid capital markets business (especially IB business) paint a favorable picture for Goldman. A stabilizing macro-environment, along with its top rank in worldwide announced and completed M&As for the first nine months of 2024, will offer support to fee-based revenues.
The company’s efforts to refocus on core capital markets business while scaling back its consumer banking footprint look encouraging. Though its efforts to exit the consumer business are expected to impact third-quarter revenues, the same is likely to generate a positive return over the long term.
While Goldman’s solid fundamentals and strong prospects remain promising, investors should not rush to buy the stock. The company’s stretched valuation warrants a pause.
To get clarity and possibly an appealing entry point, those interested in adding it to their portfolios might be better off waiting until after the quarterly results are out. Those who already have the GS stock can consider retaining it, given strong fundamentals and solid growth potential.
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How to Play Goldman Sachs Stock Ahead of Its Q3 Earnings Release?
The Goldman Sachs Group, Inc. (GS - Free Report) is scheduled to release third-quarter 2024 earnings on Oct. 15, before the opening bell.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
In second-quarter 2024, Goldman's results benefited from the strength in investment banking (IB) business and higher revenues in Commodities Client Execution (FICC) financing, along with a rise in equities revenues. Also, lower expenses and provisions acted as tailwinds.
Goldman has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an average earnings surprise of 24.38%.
Earnings Surprise History
Let us see how Godman is expected to fare in terms of revenues and earnings this time.
The Zacks Consensus Estimate for revenues is pegged at $11.76 billion, calling for a 0.5% decline from the year-ago quarter's reported figure. At the 2024 Barclays Global Financial Services Conference in early September, Goldman’s CEO, David Solomon, highlighted Goldman's consistent efforts to narrow its focus on the consumer business. He stated that by unloading the GM Card business and a separate portfolio of loans, the bank’s revenues would take a hit in the third quarter. He added, “The combination of those things this quarter will likely have an approximately $400 million pre-tax impact, largely showing up in revenues."
In the past month, the consensus estimate for quarterly earnings has been revised 16.8% downward to $6.96. The projection suggests a rally of 30.7% from the year-ago quarter's reported figure.
Estimate Revision Trend
Factors to Shape GS’ Q3 Results
Market-Making Revenues: Client activity and market volatility were decent in the third quarter. The likelihood of a soft landing of the U.S. economy, cooling inflation and easing monetary policy drove client activity. Volatility was decent in equity markets and other asset classes, including commodities, bonds and foreign exchange.
At the Barclays Conference Solomon also stated that trading revenues will probably slide 10% in the third quarter of 2024 owing to a tough year-over-year comparison and difficult trading conditions in August for fixed-income markets.
The Zacks Consensus Estimates for market-making revenues is pegged at $4.97 billion, indicating a marginal increase from the prior-year quarter’s tally.
IB Fees: Global mergers and acquisitions (M&As) in the third quarter of 2024 showed marked improvement after subdued 2023 and 2022. Deal value and volume were favorable during the quarter, driven by solid financial performance, higher chances of a soft landing of the U.S. economy, buoyant markets and interest rate cuts. Yet, tough scrutiny by antitrust regulators and lingering geopolitical issues were headwinds.
The IPO market witnessed signs of cautious optimism, given the market volatility, geopolitical challenges and global monetary easing. The remarkable equity market performance drove some solid activity in follow-up equity issuances. Further, bond issuance volume improved on favorable economic conditions and corporate spreads at near historical lows.
GS’ leadership position in worldwide announced and completed M&As, equity and equity-related offerings and common stock offerings, is likely to have provided it an edge over its peers. These factors are likely to have favorably impacted the company’s quarterly IB revenues.
The Zacks Consensus Estimate for IB fees of $1.65 billion indicates 6.1% growth from the prior-year quarter’s levels.
Net Interest Income (NII): On Sept. 18, the Federal Reserve cut the interest rates by 50 basis points to 4.75-5% for the first time since March 2020. The development is not expected to have much impact on Goldman’s NII during the third quarter. Also, relatively higher rates might have hurt NII growth prospects because of elevated funding/deposit costs and an inverted yield curve during the major part of the quarter.
The clarity on the rate cut path and the stabilizing macroeconomic backdrop are likely to have provided support to the lending scenario. Per the Fed’s latest data, the demand for loans, especially commercial and industrial loans was modest in the first two months of the quarter. Hence, loan growth for Goldman is likely to have been decent.
The Zacks Consensus Estimate for NII’s revenues is pegged at $1.82 billion, suggesting a 17.8% rise.
Expenses: Goldman’s investments in technology and market development expenses for business expansion and a rise in transaction-based expenses due to higher client activity are anticipated to have led to a rise in expenses in the to-be-reported quarter.
What Our Model Unveils for Goldman
Our proven model does not conclusively predict an earnings beat for Goldman Sachs this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
GS has an Earnings ESP of -1.68% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Goldman’s Price Performance and Valuation
Goldman outperformed the S&P 500 index in the first nine months of 2024. Some other major finance sector stocks that outperformed the index include Citigroup (C - Free Report) and JPMorgan (JPM - Free Report) .
Price Performance
Image Source: Zacks Investment Research
JPM is slated to announce its quarterly numbers on Oct. 11, while C will release the same on Oct. 15.
Let’s look at the value Goldman Sachs offers investors at current levels.
Currently, GS is trading at 12.42X forward 12 months earnings, above its five-year median of 9.82X. Meanwhile, the industry’s forward earnings multiple sits at 10.49X. The company’s valuation looks somewhat stretched compared with its range and the industry average.
Price-to-Earnings (forward 12 Months)
Goldman’s Investment Thesis
Goldman is well-positioned for future growth on the back of its focus on core operations, opportunistic buyouts and improving demand in global deal-making. The firm is actively engaged in strategic initiatives, which will boost its IB and trading businesses.
GS came out as a winner after challenging the Fed to reduce its capital requirements over its 2024 stress test result, which initially forced this Wall Street investment bank to hold a higher amount of capital.
The central bank lowered the extra capital level requirement of Goldman Sachs. The bank now must hold a stress capital buffer of 6.2%, down from the 6.4% suggested initially. With this, GS will be required to hold common equity equal to 13.7% of its risk-weighted assets instead of the 13.9% the Fed initially advised.
As its capital requirement lowers, the bank can utilize this to increase capital distributions and buyback plans.
The company continues to reward shareholders handsomely. In July 2024, Goldman’s board of directors approved a 9.1% increase in the common stock dividend to $3 per share. In the past five years, the company hiked dividends four times with an annualized growth rate of 24.80%. Currently, its payout ratio sits at 35% of earnings.
Mounting expenses due to investment in technology and business expansion will limit the company’s growth.
Final Thoughts on Goldman
Decent client activity, improving lending scenario and the solid capital markets business (especially IB business) paint a favorable picture for Goldman. A stabilizing macro-environment, along with its top rank in worldwide announced and completed M&As for the first nine months of 2024, will offer support to fee-based revenues.
The company’s efforts to refocus on core capital markets business while scaling back its consumer banking footprint look encouraging. Though its efforts to exit the consumer business are expected to impact third-quarter revenues, the same is likely to generate a positive return over the long term.
While Goldman’s solid fundamentals and strong prospects remain promising, investors should not rush to buy the stock. The company’s stretched valuation warrants a pause.
To get clarity and possibly an appealing entry point, those interested in adding it to their portfolios might be better off waiting until after the quarterly results are out. Those who already have the GS stock can consider retaining it, given strong fundamentals and solid growth potential.