Goldman Sachs Earnings Preview: Trading, Underwriting, Stress Test

Trading and underwriting are key

Goldman Sachs (GS) is expected to report its second-quarter earnings on July 17. The investment banking giant is expected to post EPS of $4.66, an implied growth of 18% YoY (year-over-year), helped by higher trading in equities, wealth management assets, fees from underwriting of structured debt, and lower taxes. On a sequential basis, it could see a decline of 37%, mainly due to stellar trading revenues in the first quarter on higher volatility as a result of the pace of interest rate hikes, the geopolitical situation, and trade wars.

The broad markets (DJI) have gained at a steady pace in the second quarter from the lows in February, due to strong economic data and jobs data in recent months. However, the trade war escalation toward the end of June caused some spike in volatility, which could marginally improve its Q2 performance.

Goldman Sachs Earnings Preview: Trading, Underwriting, Stress Test

Goldman Sachs is expected to see 10.9% growth in revenues to $8.7 billion on higher investment banking, inflows in wealth management, trading revenues, and a lower base of the first quarter of 2017. Banks (XLF) are seeing slower credit offtake and retail spending amid rising rates and a hit on consumer confidence due to levies imposed by the Trump administration on imports from China.

Structured debt

JPMorgan Chase (JPM) leads among the major bankers in investment banking wallet share, followed by Bank of America (BAC) and Goldman Sachs (GS). However, Goldman has benefited from structured debt financing deals that have seen an escalation in demand due to volatile equities and strict underwriting guidelines on prime debt.

The majority of bankers have witnessed sequential declines in investment banking fees in the first half of 2018.

Stress tests

Goldman Sachs (GS) and Morgan Stanley (MS) have passed their stress tests in 2018, with a condition of not increasing shareholder payouts. That could prove to be a major impediment to improving investor confidence in the upcoming quarters. Goldman Sachs may have to expand in more stable areas of generating revenue in order to improve payouts in the next year.