Goldman Sachs Earnings Preview: Can GS maintain its momentum?

Goldman Sachs (GS) is set to report its Q2 2024 results on Monday before the market opens, with a conference call scheduled for 9:30 AM ET. Analysts expect the company to deliver an adjusted EPS of $8.35, marking a significant 171% year-over-year increase, and revenues of $12.35 billion, a 13% improvement. Historically, GS has had a mixed track record in meeting quarterly expectations, with varying degrees of earnings beats over the past few quarters. The firm has undergone restructuring, focusing on investment banking, trading, asset and wealth management, and its platforms business, following the sale of its consumer lending platform, GreenSky.

Price action heading into the report shows GS shares up 24% since Q1 results in mid-April, driven by solid performance and an uptick in leveraged finance activity. Investors are keenly watching how the divestment of GreenSky will impact GS’s focus on its remaining segments, Global Banking & Markets (GBM) and Asset & Wealth Management (AWM), which showed strong performance last quarter.

Ahead of the earnings report, key points for investors include GS's handling of interest rates and their impact on business. CEO David Solomon's previous comments on the potential for multiple rate cuts following recent cooler-than-expected CPI data are crucial. If the Fed cuts rates significantly, it could boost corporate activities like M&A, positively affecting GS's GBM segment. GS's lack of formal guidance makes management commentary critical, especially as previous statements from Solomon have been cautiously optimistic.

Investors should also note the potential for profit-taking, given GS's recent share appreciation and its high valuation premium. This is the price action investors saw in the J.P. Morgan, Wells Fargo, and Citigroup after their Q2 reports. Analysts have expressed concerns about this, even as GS has refocused on its core strengths in investment banking and trading. The firm's track record of strong deal flow and revenue growth positions it well for future success, although near-term volatility remains possible due to high resistance levels.

Goldman Sachs's strategic refocus on investment banking and trading, along with positive performance in Q1 2024, has bolstered investor confidence. The bank reported net revenues of $14.21 billion in Q1, driven by a significant year-over-year increase in debt and equity underwriting and investment banking fees. These results have helped the stock outperform sector benchmarks, rising 22% in 2024.

Goldman Sachs delivered impressive Q1 earnings, boosted by a strong equity market, increased leveraged finance activity, and a favorable year-over-year comparison in Private Banking. The investment bank reported a 16.1% increase in overall revenues to $14.21 billion and adjusted EPS of $11.58, both exceeding estimates. The Global Banking & Markets (GBM) segment, which made up 68% of Q1 revenue, saw a 15% year-over-year rise in sales, driven by broad-based growth across Investment Banking fees, Debt underwriting, M&A activity, and stock offerings. Additionally, the Asset & Wealth Management (AWM) segment performed exceptionally well, with an 18% revenue increase due to higher net revenues in Private Banking, Equity investments, and Management fees.

Despite these strong results, GS faced some headwinds highlighted by peers like JPMorgan, Wells Fargo, and Citigroup, such as softening loan demand and fixed income declines. However, Goldman Sachs, having divested its GreenSky platform, avoided many of these issues by focusing on its core GBM and AWM segments. CEO David Solomon expressed a cautious outlook on the U.S. economy, acknowledging potential challenges from inflation, commercial real estate, and geopolitical tensions. While the Q1 results provided a much-needed boost to GS shares, Solomon's tempered tone mirrored broader economic concerns, suggesting potential hurdles ahead for the firm.

In summary, Goldman Sachs's upcoming Q2 report will be closely watched for its ability to continue delivering strong financial results amid a challenging macroeconomic environment. Investors will be particularly interested in management’s commentary on interest rates, economic outlook, and strategic initiatives. The firm's recent restructuring and focus on high-margin businesses have positioned it well for sustained growth, but the high bar set by recent share performance means that Q2 results will need to impress to maintain investor confidence.