Goldman Sachs' Q2 Earnings: Navigating Late-Cycle Markets with Secular Strength

As the Federal Reserve's tightening cycle edges closer to its end and economic growth slows, investors are seeking clues to navigate late-cycle markets. Goldman Sachs' Q2 2025 earnings offer a blueprint: the bank's performance highlights a mix of cyclical resilience and secular momentum, with implications for portfolio positioning in an uncertain environment.

Cyclical Strength in Advisory and Trading

Goldman's Global Banking & Markets division posted $10.1 billion in Q2 revenue, driven by record financing income and robust trading activity. Equity intermediation revenues jumped 45% year-over-year, while fixed-income financing hit $1 billion—both reflecting strong client demand for liquidity and risk management.

This cyclical performance is notable. M&A advisory fees surged 71% YoY, fueled by a backlog of deals that has grown for five consecutive quarters. The Americas and EMEA regions led this growth, suggesting corporate confidence in cross-border and regional transactions. However, as economic uncertainty rises, M&A activity typically slows—meaning this momentum may prove fleeting.

Equity underwriting, while flat at $428 million, saw high-profile IPOs like Chime and eToro perform well post-listing. Yet, broader IPO volumes remain subdued, a cyclical headwind in risk-off environments.

Secular Shifts in Wealth Management and Alternatives

The Asset and Wealth Management (AWM) segment underscores secular trends. AUM hit a record $3.3 trillion, with alternatives growing to $355 billion under supervision. This reflects a long-term shift toward diversification in portfolios, as investors prioritize less correlated assets.

Despite modest private portfolio losses—primarily in real estate—management's focus on fee-based advisory services and solutions businesses signals a strategic pivot. The goal: to reduce reliance on volatile markets and capitalize on structural demand for wealth management.

Risks in a Slowing Economy

Goldman's challenges are also cyclical. Provision for credit losses rose to $384 million, driven by credit card defaults. Private equity portfolios face a “more challenging harvesting environment,” as real estate valuations remain under pressure. These risks highlight vulnerabilities in traditional lending and private markets, which typically lag in economic downturns.

Strategic Leverage: AI and Capital Efficiency

The bank's investments in AI—such as its firm-wide assistant and software development tools—aim to boost productivity and reduce costs. Combined with a 33% dividend hike to $4 per share, these moves signal confidence in maintaining capital strength. The CET1 ratio of 14.5% exceeds regulatory requirements, providing a buffer for both dividends and strategic bets.

Investment Implications

For investors, Goldman's results suggest two paths:
1. Cyclical Plays: Capitalize on near-term momentum in M&A and trading, but be prepared to rotate out as economic risks materialize.
2. Secular Bets: Focus on the bank's wealth management and alternatives businesses, which align with long-term trends in financial services.

Consider overweighting Goldman Sachs stock (GS) if you believe its secular advantages will outpace cyclical headwinds. Alternatively, pair exposure to GS with ETFs like the Financial Select Sector SPDR Fund (XLF) to diversify cyclical risks.

Conclusion

Goldman Sachs' Q2 results reveal a financial institution balancing late-cycle opportunities with secular transformation. While cyclical divisions like advisory and trading offer short-term gains, the bank's long-term value lies in its pivot to wealth management, alternatives, and tech-driven efficiency. Investors should prioritize these secular tailwinds while hedging against cyclical risks—a strategy as vital as the markets themselves.

Data as of July 2025. Past performance does not guarantee future results.