The truth behind Goldman Sachs's surprising stock rally

Key Points

• Goldman Sachs stock is only getting started on its new bull run, or at least historical evidence points to it being the case.
• Analysts are spreading their expectations significantly apart from this bank against other competitors. 
• The Federal Reserve (Fed) will pull the interest lever and unleash an EPS expansion in this name shortly.

Markets shift in every cycle, and timing shifts are nearly impossible. Most investors learned this the hard way in 2023. 

When the Federal Reserve (the Fed) took on its new path of hiking interest rates through the year, markets still rallied aggressively when historically rising rates typically mean stocks come down.

Today, the Fed has pivoted to the opposite end of the spectrum, pointing to six rate cuts coming into 2024. By all means of historical evidence, these announcements should have caused the S&P 500 to reach new highs; to many investors' surprise, the opposite happened during the first week of 2024.

One thing is for sure: the financial stock sector has seen the better end of this dynamic, judging by the Financial Select Sector SPDR Fund NYSEARCA: XLF and its 15.6% performance during the past quarter. Within this group, one stock, The Goldman Sachs Group NYSE: GS, promises the most intense upside potential, but more on that later.

Forces of nature

One significant difference makes Goldman Sachs stand out as an investment bank. Most of its business is focused on two segments: corporate finance and a combination of sales and trading activities. In simple terms, these are businesses highly dependent on the credit cycle (interest rates).

Now that financing will become cheaper, thanks to the FED lowering interest rates, a new wave of activity will float into Goldman's businesses. This happens every cycle. With every new wave comes a mountain of new fees and commissions.

This time around, it is different than before. 

Why? 

The VIX has been at its lowest levels since 2019. Stocks are being passive and quiet today, thinning potential trading profits.

Lower interest rates could come with a spike in the VIX, allowing for attractive business valuations (lower stock prices) and lower financing rates (cheaper money) and significantly boosting the future earnings per share at the bank.

So look, Goldman stock is trading at its 52-week high today, and that stellar performance comes after rising by 12.4% during the past twelve months. The answer anyone — maybe even you — is looking for is: Is there any room left for an up move in the stock?

Analysts will bet on a solid yes, but remember that last time the FED lowered interest rates (2020-2021), this stock more than doubled in price, and its financials were there to back the expansion due to these same forces.

One more push 

Comparing Goldman to other bank stocks like J.P. Morgan Chase & Co. NYSE: JPM can give you another insight to figure out the interest rate puzzle. Because J.P. is more of a "commercial" bank, which means more of its operations focus on consumer products like loans and credit, lower interest rates will negatively affect its earnings.

This may be why analysts boldly project earnings per share contraction of 6% for the next 12 months in J.P. stock, which could have a massive effect on the stock price considering just how big this firm is (roughly $500 billion in market capitalization).

On the other hand, a completely different hand, Goldman Sachs analysts are comfortable projecting EPS growth of 43.6% for the next year, which is significantly above the industry average expected growth of 19.6%. 

This expectation gap is here for a good reason.

So, why Goldman?

Other investment banks like Morgan Stanley NYSE: MS could just as well benefit from the coming flexible financing environment and stock market volatility, but as most are aware, Goldman carries with it a particular reputation when it comes to making money.

Would it be surprising that Morgan Stanley analysts only project 18.9% EPS growth? This is still decently attractive and could prove bullish for the stock; it doesn't compare to Goldman's 43.6%. Knowing that the market will be after growth now that interest rates will offer little of it on yields makes Goldman stock all the more attractive.

Knowing the wave that is about to hit the bank's financials, even competitor Barclays PLC NYSE: BCS is raising price targets for Goldman, shooting as high as $493 a share, which also happens to represent a potential upside of 27.6% from today's prices.