Forget about whether Goldman Sachs (GS) beats earnings per share estimates when it reports first-quarter results on Tuesday before the stock market opens. It trounced earnings estimates by an average of 17.6% in each of its past three quarters. Shares fell after each report.
Trading thrives on volatility, which has been all but absent from investment markets until this year. In their first-quarter reports on Friday, J.P. Morgan (JPM) and Citigroup (C) both reported increases in trading revenues. But the results were driven by strong results in equities; fixed income and related trading was flat for JPMorgan and down for Citi.
If Goldman shows a similar trend on Tuesday, investors could send shares lower. Barron’s wrote favorably about the stock in a January cover story. As we noted then, three out of four businesses are prospering: investment banking; investing and lending; and money management. The fourth, trading, has suffered a years-long slump, for reasons that are likely a mix of temporary (low volatility) and structural (proliferation of trading data driving margins lower).
Last quarter, Goldman brought in $1.4 billion from trading equities, and just $1.0 billion from trading fixed income, currency and commodities, or FICC. But that’s after FICC revenue plunged 50% to reach the lowest level since Goldman started breaking it out in 2010. Revenue from equities trading fell 14%.
Mathematically, now that equities are a larger business for Goldman than FICC, it’s arguably set up well for a JPM-like quarter of strong equities growth and flat FICC. But that math might not matter to shareholders. Consensus estimates call for 15% revenue growth in equities from a year earlier, and 26% growth in FICC.
Hence, a JPM-like quarter might not be good enough for Goldman. It likely needs better trading results than peers, either from doing more of the right things in the first quarter, or less of whatever trashed its FICC revenues in the fourth quarter.
For those watching the report, here are first-quarter consensus estimates, according to FactSet: Total revenue $8.76 billion; earnings per share $5.58; overall trading revenue (a.k.a. institutional client services) $4.0 billion; FICC trading $2.1 billion; equities trading $1.9 billion.
