Will Goldman Sachs' Earnings & Revenue Beats Lift Sector Higher?

Key Points

• Shares of Goldman Sachs gapped up at the open Tuesday following a better-than-expected third-quarter report.
• Earnings came in at $8.25 per share on revenue of $11.41 billion. Both were down from a year ago, but ahead of analysts' views.
• The company is reorganizing into three business units. One new unit, Platform Solutions, will have a greater focus on fintech. 

What does Tuesday’s opening 4% gap-up in Goldman Sachs NYSE: GS say about the potential for a sector-wide rally?

The investment banking and asset management giant reported better-than-expected third-quarter earnings of $8.25 per share, topping views of $7.69 per share. That marked a year-over-year decline of 45%, but investors tend to like estimate-beating results. 

Revenue also came in higher than expectations, at $11.98 billion. Analysts had expected $11.41 billion. That’s down 12% from a year ago. 

Goldman Sachs’ report follows results from other big banks, including Wells Fargo NYSE: WFC, JPMorgan Chase NYSE: JPM, Bank of America NYSE: BAC and Morgan Stanley NYSE: MS. 

Overall, investors are encouraged by what they are seeing. The Financials sector, as tracked by the Financial Select Sector SPDR ETF NYSEARCA: XLF, advanced 3.38% in the past five days. That makes it the leading sector during that time frame. 

Goldman Sachs is the fifth most heavily weighted component in the sector, following Berkshire Hathaway NYSE: BRK.B, JPMorgan Chase, Bank of America, and Wells Fargo. 

One factor driving Goldman Sachs’ revenue decline: Less IPO underwriting business in 2022 as the broader market has been correcting, and there’s reduced appetite to bring new companies public. The broad market decline also meant lower revenue from the asset management unit. 

However, fixed-income and currency trading were bright spots in the quarter, offsetting some weaknesses in other areas. The fixed-income unit came in with $3.53 billion in revenue, up 41% jump from a year ago, and ahead of views. 

Early in the session, trading volume in Goldman was more than 850% higher than average as institutions snapped up shares. 

One key point from the report concerned the firm’s provision for credit losses, which many banks are increasing in anticipation of a recession and rising interest rates. These could potentially cause more customers to default on debt or be slow to pay. Banks have already been reporting on their loan-loss reserves, which have been rising for the past three months.

Bank reserves were increased two years ago in anticipation of losses due to Covid restrictions that shut down businesses, but that crisis was averted due to stimulus payments. 

Things are different now, although Goldman Sachs actually decreased its provision from the second quarter. 

In its report Tuesday, the company said its provision for credit losses was $515 million for the third quarter, compared with $175 million a year ago and $667 million in the second quarter.

The company explained the reason for the decrease, saying, “Provisions for the third quarter of 2022 reflected consumer portfolio growth, net chargeoffs, and the impact of continued broad concerns on the macroeconomic outlook. The third quarter of 2021 primarily reflected provisions related to portfolio growth (primarily in credit cards).”

The firm’s total allowance for credit losses was $5.59 billion as of September 30, 2022. 

In another sign of the times, Goldman Sachs announced a reorganization of its business units. It will now operate in three segments:

• Asset & Wealth Management: This is an intuitive shift, as wealth management already has some overlap with asset management, in terms of practical application. Goldman’s consumer banking business, Marcus, will also be included here.
• Global Banking & Markets: This combines trading and investment banking, a similar structure to other big banks. 
• Platform Solutions: This is a nod to the growing importance of fintech, and includes GreenSky, an online-based lending platform Goldman acquired for $2.2 billion in March. 

Two hours into Tuesday’s session, there was some intraday profit taking in Goldman shares, with traders pocketing profits after the gap higher. Despite the post-earnings rally, the stock is down 18% year-to-date, and there’s still plenty of room for higher interest rates and a weakening economy to derail revenue and earnings in the coming months.