Goldman Sachs $Goldman Sachs(GS)$ faces several challenges ahead, particularly in the short term, as it prepares to report its third-quarter earnings. While the stock has performed well so far in 2024, rising 26%, recent developments hint at potential volatility and downside risks, especially with a notable decline in trading revenue expected and a continued focus on shifting business models.
Declining Trading Revenue and Market Conditions
CEO David Solomon has already cautioned that trading revenue for Goldman Sachs is likely to drop by 10% in Q3, with fixed income, currencies, and commodities (FICC) being the hardest hit. This is not an isolated issue but reflects broader macroeconomic conditions, particularly the challenging environment seen in August. Solomon emphasized that the comparison to a notably strong Q3 2023 compounds the difficulty, which could be viewed as a risk factor in terms of investor expectations.
Given that trading accounts for approximately 45% of the bank's revenue, a decline in this area may weigh heavily on overall performance. Investors should be mindful that banks like Goldman Sachs and Morgan Stanley are highly exposed to market swings. The market's turbulence in August, with early sell-offs followed by a recovery, could indicate continued volatility in Q4, depending on global economic conditions.
Headwinds from the Consumer Banking Exit
Adding to these concerns, Goldman is set to take a $400 million pretax hit as it continues unwinding its consumer banking business, notably the GM Card. While this pivot away from consumer retail may help Goldman focus on more reliable revenue streams like asset and wealth management, in the near term, it creates a drag on Q3 results. The bank's previous venture into consumer banking resulted in significant write-downs, further highlighting the risks tied to failed strategic decisions.
Solomon’s initiative to grow retail lending via the Apple Card and other platforms had initially shown promise, but mounting losses and regulatory challenges eventually forced the bank to retreat from this space. Investors need to consider that the current quarter's earnings will still reflect these missteps, weighing on the bank's profitability.
Investment Banking and IPO Markets
On a more optimistic note, Goldman has observed improving activity in its investment banking division, with a better backlog of deals. Solomon mentioned that while financial sponsors have not been as active as expected, this could change as Federal Reserve rate cuts are anticipated. However, in the immediate future, high interest rates have stalled major transactions like IPOs and acquisitions, and there is no guarantee of a quick turnaround.
Investors expecting a significant boost from investment banking may need to temper their expectations until there is more clarity on the Fed's rate policy and corporate clients' willingness to engage in big-ticket deals.
Elevated Expectations and Market Sentiment
Goldman's strong performance in the first half of the year, especially in its asset and wealth management divisions, helped boost investor sentiment. However, with the stock near its record high and facing softer trading revenue, a negative surprise in the Q3 earnings report could trigger a swift revaluation by the market.
The stock’s current elevated level, combined with high investor expectations, poses risks if the results fall short of forecasts. The after-hours drop of 1% following Solomon’s remarks at the Barclays conference might signal caution from the market ahead of earnings. Investors should monitor the stock's behaviour closely in the run-up to October 15, 2024, as any further signs of weakness in trading volumes or market sentiment could exacerbate the downside risks.
Conclusion: Risk Factors to Watch
While Goldman Sachs remains a financial powerhouse, short-term risks stemming from declining trading revenues, the impact of the consumer banking unwind, and uncertainty in investment banking activity warrant caution. With the Q3 earnings report looming, investors should closely watch the stock’s price movement and overall market behaviour. Given the elevated expectations, even a minor disappointment could lead to heightened volatility, potentially making this a more precarious period for GS stockholders.
Goldman’s long-term strategy of focusing on asset and wealth management might eventually bear fruit, but in the short term, the outlook appears uncertain. Investors would do well to consider these risks before making any decisions ahead of the earnings report.
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