When is an 80% jump in profits a “miss”? When it’s Goldman Sachs Group Inc (NYSE:GS), and when the Street was expecting more.
The bank earned $2.16 billion — $5.15 per share — during the first quarter, on revenue of $8.03 billion, against profits of $1.20 billion, $2.68 per share and revenue of $6.34 billion during the same quarter a year ago.
If most companies did that, then there would be dancing in the streets. But the totals fell short of estimates, and there was trouble on GS’ trading desks. Trading revenue fell 2%, and there was a 6% decline in stock trading revenue. Goldman Sachs’ explanations — low volatility, political uncertainty — didn’t go down well especially when employee costs jumped 24%, and operating expenses rose 15%.
The question is whether this is a problem unique to GS stock or if this is an economic problem. Much will depend on what Morgan Stanley (NYSE:MS) reports on April 19. If they beat expectations on earnings, as Bank of America Corp (NYSE:BAC) did, then it’s just a Goldman Sachs problem.
If not, then it’s trouble.
Is This Trouble Exclusive to Goldman Sachs?
For now, most traders seem prepared to call this a Goldman Sachs problem: GS stock had jumped $2 during after-hours trading on April 17, as investors anticipated good news, but fell through all that and more, to $219.37 before trading opened April 18, as the numbers were digested.
Based on the overall performance of the market, with the average stock in the S&P 500 rising nearly 5%, Goldman Sachs’ excuses just did not wash, and speculators have been leaning that way for a month. GS stock stood at $248 when the 65-cent-per-share dividend was paid out Mar. 1, and got as high as $253 a few days later, but then slumped to $225, by Mar. 27.
InvestorPlace writers have been generally bullish on Goldman Sachs, as have many other analysts. The shares were rated “overweight” by a pack of 29 of them, with earnings estimates for the quarter ranging from $5.31 to $5.72 per share.
Some traders obviously anticipated problems with this quarter after the company’s top foreign exchange trader, Robin Brooks, quit on March 1. The bear run on GS stock began a few days after he left. Brooks left while predicting the dollar would continue to strengthen, a move that peaked against the Euro on March 27, but which has since reversed.
Bottom Line on GS Stock
The strong dollar may be a bigger headwind for Goldman Sachs, and the market, than the company’s calls and operations.
The Trump administration has been trying to get the dollar down, with pro-inflation policies and some presidential jawboning. A strong dollar makes the country’s trade balance worse, increasing the price of exports, while cutting the price of imports, threatening U.S. jobs.
The President’s recent actions break with recent tradition, in which policymakers avoid talking about currencies and, when they do, they praise the strength of the dollar.
Meanwhile, we have Morgan Stanley to look forward to, as a guide to whether the problems for GS stock are the market’s or the bank’s. The consensus is for Morgan Stanley to earn 90 cents per share on $9.10 billion in revenue, but there is a “whisper number” of 97 cents, and if the bank hits that, the market will breathe a sigh of relief.
Even Goldman Sachs shareholders may do that, figuring the bank will solve its problems and make the current price look very low when they do. Meanwhile, Bank of America looks like the best bet on the banking board. It’s up for the year, while the other big banks are down.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, did not hold a position in any of the aforementioned securities.
