Goldman Sachs (GS) Pre Q2 Earnings: To Buy or Stay Clear
The Goldman Sachs Group, Inc. GS is slated to release second-quarter 2024 earnings on Jul 15, before the opening bell.
GS stock hit a 52-week high on Jul 10 and is currently trading at a two-year high of $478.89. Should you buy it ahead of its second-quarter numbers? Before we analyze the stock’s investment worthiness, it’s time to look at the company’s historical performance and how it is expected to fare this time.
Goldman has a decent earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters and missed once, with an earnings surprise of 22.78%, on average.
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Now, let’s check out how Godman is expected to fare in terms of revenues and earnings this time. The Zacks Consensus Estimate for second-quarter revenues is pegged at $12.68 billion, calling for a 16.4% rise from the year-ago quarter's reported figure.
For quarterly earnings, in the past month, the consensus estimate has been revised 1.9% downward to $8.70. The projection suggests a surge of 182.5% from $3.08 reported in the prior-year quarter.
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Earnings Whispers
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’re reported with our Earnings ESP Filter.
GS has an Earnings ESP of -1.35% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
Factors to Shape GS’ Q2 Results
Market-Making Revenues: GS is likely to have recorded solid growth in market revenues driven by decent client activity during second-quarter 2024. The likelihood of a soft landing of the U.S. economy, gradually cooling inflation and clarity on the Federal Reserve’s rate cut path drove the client activity. Volatility was low in equity markets and other asset classes, including commodities, bonds, and foreign exchange.
The Zacks Consensus Estimates for market-making revenues is pegged at $5.03 billion, indicating an increase of 15.6% from the prior year’s quarter-reported figure.
Investment Banking (IB) Fees: Global mergers and acquisitions (M&As) bounced back in second-quarter 2024 after muted performances in the past couple of years. Both deal value and volume witnessed a remarkable comeback driven by solid financial performance, fading recession risks, buoyant markets and expected rate cuts this year. Yet, harsh scrutiny by antitrust regulators and persistent geopolitical tensions have continued to act as headwinds.
The IPO market activity was decent in the second quarter on the back of a robust equity market performance. This also drove some activity in follow-up equity issuances. Debt issuance volume was aided by lower yields, a better operating backdrop compared with last year.
A stabilizing macro-environment, along with Goldman’s leadership position in worldwide announced and completed M&As, equity and equity-related offerings and common stock offerings, is likely to have lent it an edge over its peers. Hence, these are likely to have favorably impacted Goldman’s quarterly IB revenues.
The Zacks Consensus Estimate for IB fees of $1.92 billion indicates 34.2% growth from the prior-year quarter’s actuals.
Net Interest Income (NII): A stabilizing macroeconomic backdrop, along with the expectations of the Fed easing interest rates going forward, is likely to have offered some support to the lending scenario in the quarter-to-be reported. The demand for loans, especially commercial and industrial loans, improved from first-quarter 2024, per the Fed’s latest data. Hence, loan growth for Goldman is likely to have been decent.
As the Fed kept the interest rates at a 23-year high of 5.25-5.5% during the quarter, GS is less likely to have recorded a solid improvement in NII. Also, the inverted yield curve in the June-ended quarter and high funding costs are expected to have put pressure on NII.
The Zacks Consensus Estimate for NII’s revenues is pegged at $1.49 billion, suggesting an 11.4% plunge from the prior-year quarter’s reported figure.
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.
Price Performance and Valuation
Goldman outperformed the S&P 500 index in the first half of 2024. The other major finance sector stocks outperforming the index include Citigroup C and JPMorgan JPM.
First Half 2024 Price Performance
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C and JPM are slated to release second-quarter 2024 numbers on Jul 12.
Let’s look at the value Goldman Sachs offers investors at current levels.
Currently, GS is trading at 12.44X forward 12 months earnings, above its five-year median of 9.70X. Meanwhile, the industry’s forward earnings multiple sits at 10.55X. The company’s valuation looks somewhat stretched compared with its range and the industry average.
Price-to Earnings (Forward 12 Months)
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Investment Consideration: Risk and Reward Trade-Off
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. A deepening market presence and solid liquidity will further aid financials. The company is actively engaged in strategic initiatives, which will boost its IB and trading businesses.
GS also continues to reward shareholders handsomely. As it cleared the 2024 stress test, the company intends to increase its quarterly dividend by 9% to $3.00 per share. In the past five years, the company hiked dividends four times with an annualized growth rate of 24.42%. Currently, its payout ratio sits at 43% of earnings.
Mounting expenses due to investment in technology and business expansion will limit the company’s growth. Also, adverse impacts from prolonged higher rates, leading to high deposit costs will keep hampering the top line.
Conclusion
Decent client activity, improving lending scenario and lower volatility in the capital markets paint a favorable picture for Goldman. A stabilizing macro-environment, along with its top rank in worldwide announced and completed M&As, will offer support to fee-based revenues.
Potential investors should exercise caution over concerns related to elevated expenses and high funding costs.
As GS is trading at a two-year high, it reflects investors’ highly bullish expectations from the second-quarter results. Near-term volatility is likely to occur as markets process and adjust to the revisions. The company’s stretched valuation warrants a pause.
While Goldman’s solid fundamentals and strong prospects remain promising, investors should not rush to buy the stock. 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.
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