What's in Store for Goldman (GS) This Earnings Season?

The Goldman Sachs Group, Inc.GS is scheduled to report its third-quarter 2015 results before the opening bell on Thursday, Oct 15. Too many questions linger in investors' minds this time around, given the tough industry backdrop and litigation hassles that the bank endured during the quarter.

In the last quarter, this banking giant delivered a 28.38% positive earnings surprise, beating the Zacks Consensus Estimate. Higher investment banking along with strong capital deployment activities were the positives for the quarter. However, increased expenses were a concern. Notably, Goldman recorded a 28.63% average positive earnings surprise over the trailing four quarters.

Will Goldman be able to keep the earnings streak alive after combating the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q3 Results

Despite continued uncertainty surrounding China that should have ideally propped up trading activities, tighter regulation and a risk-averse approach kept many people off financial activities. The quarter was no better in terms of volatility in the financial markets and rising structural pressure. Further, there were downsides like soft trading volumes and lackluster client activities.

Non-interest income will likely be hit by a slump in trading revenues, as ambiguity over several global and domestic issues kept investors away from markets.

On the investment banking front, with elevated M&A activities, advisory and underwriting revenues should show improvement. However, the equities division might witness a slowdown due to caution exercised by investors amid uncertainties surrounding the global economies and domestic interest rate environment. This, along with weakness in rates and seasonality, could lead to an overall decline in investment banking revenues.

Mortgage business on the other hand looks to have been rising, as the low rate environment might have pushed people to refinance home loans. Moderate growth in fresh mortgage originations is also expected.

Aggressive cost control through streamlined operations should also contribute to the bottom line. Notably, in sync with the company's focus on shedding non-core operations and utilizing freed up resources for its traditional lending business, Goldman completely exited from the physical commodity business with the sale of its Columbian coal mines.

Further, Goldman jumped on the bandwagon of Wall Street banks, which are targeting the fastest growing market of actively managed exchange-traded funds (ETFs) and launched its first ETF - ActiveBeta US Large Cap Equity ETF (GSLC), in September. The newly launched fund with $50 million in institutional assets is the first in the series of "ActiveBeta" funds to be launched by Goldman in the upcoming months. Given the underlying strength in the ETF market, it is a prudent decision for Goldman to expand in this area.

However, given the competitive environment and stringent regulatory landscape, global banks are facing tough challenges in controlling costs and increasing revenue. To make matters worse, a number of major banks have been encountering legal overhangs in recent times. In August, Goldman raised estimates for potential legal losses by 55% to $5.9 billion. The increase was triggered by a probable settlement with authorities regarding risky mortgage-backed securities.

Most importantly, this banking giant failed to impress analysts with its level of activities during the quarter. The weakness surrounding the industry and the company's financials, which are highly susceptible to such negatives forced many analysts to significantly lower their earnings estimates. The Zacks Consensus Estimate has moved down around 8.8% to $3.23 per share over the last seven days.

Earnings Whispers

Our proven model does not conclusively show that Goldman is likely to beat the Zacks Consensus Estimate in the third quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for Goldman is -2.79%. This is because the Most Accurate estimate of $3.14 is below the Zacks Consensus Estimate of $3.23.

Zacks Rank: Though Goldman's Zacks Rank #3 increases the predictive power of ESP, we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The PNC Financial Services Group, Inc. PNC has an earnings ESP of +0.56% and carries a Zacks Rank #3. It is scheduled to report its third-quarter results on Oct 14.

The earnings ESP for M&T Bank Corporation MTB is +1.52% and it carries a Zacks Rank #3. The company is expected to release its third-quarter results on Oct 16.

Capital One Financial Corporation COF has an earnings ESP of +3.14% and carries a Zacks Rank #3. It is expected to report its third-quarter results on Oct 22.

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PNC FINL SVC CP (PNC): Free Stock Analysis Report

CAPITAL ONE FIN (COF): Free Stock Analysis Report

M&T BANK CORP (MTB): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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