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February 21, 2024

Goldman Sachs Earnings Expected to Drop Though Wealth Management Gains

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Jan 16, 2024

Goldman Sachs is set to report its fourth quarter 2023 earnings results before the market opens on Tuesday, January 17. Analysts expect the investment bank’s profits to fall from the prior year period, reflecting ongoing macroeconomic headwinds. However, Goldman’s wealth management division has seen strong growth recently, partially offsetting pressures in other areas of the business.

Wealth Management Focus Paying Off as Environment Remains Challenging

Goldman is doubling down on efforts to attract ultra-high net worth individuals as volatile markets dent profits elsewhere. The bank is providing more loans and tailored products to wealthy clients in order to grow assets under supervision.

This strategic pivot has already borne fruit. Assets under supervision in Goldman’s wealth management division grew over 30% in 2022 to reach $7.3 trillion. The unit accounted for over a quarter of the bank’s total 2022 revenue – compared to just 17% in 2017.

Goldman President John Waldron said the wealth business is “strategically important” as other divisions face revenue declines in choppy markets characterized by low volumes in investment banking.

The focus on wealthy individuals also offers higher profit margins. Lending money to ultra rich clients is more profitable than standard consumer lending. And providing customized offerings helps Goldman earn higher fees.

Goldman Sachs Wealth Management Division Growth

Metric 2022 2021 % Change
Assets Under Supervision $7.3 tn $5.39 tn +36%
Share of Goldman Revenue 27% 24% +3 pts

So while market headwinds have impacted trading, underwriting, and other banking activities – the acceleration in wealth management is providing an earnings buffer heading into the new year.

Q4 Earnings Set to Decline on Lower Investment Banking Fees

Overall Goldman Sachs is still facing revenue and profit declines amidst market uncertainty. Analysts forecast fourth quarter adjusted earnings per share of $5.42 – an over 30% decrease compared to $7.73 in the same quarter last year.

The macroeconomic climate of rising rates, inflation, and recession fears continues weighing on financial markets – cutting into firms’ earnings. Specifically for Goldman, advisory services and equity underwriting activity has fallen significantly from 2021 highs.

The bank relies heavily on fees generated from advising companies on mergers, IPOs, bond issuances, and other transactions. But tighter financial conditions have depressed deal-making, with global M&A down over 33% according to Refinitiv data.

Equity underwriting also remains muted. And while fixed income trading volume increased recently on a flurry of interest rate moves – it likely will not fully offset declines in investment banking.

As a result, Goldman’s total fourth quarter revenues are expected to drop over 25% year-over-year to $10.92 billion.

Bottom Line Performance Still Strong Despite Profit Pressures

With profits headed lower in Q4, Goldman stock has shed over 10% in the past month leading up to earnings. Shares trade at just 8.6 times forward earnings – nearing decade low valuations.

The Q4 declines will mark the fourth straight quarter of profit decreases for Goldman as markets struggle to find firmer footing.

However, analysts still largely praise Goldman’s performance given the economic circumstances. And the bank continues generating strong returns for shareholders via dividends and buybacks.

Goldman returned over $11 billion to shareholders in 2022 through repurchases and dividends. And the stock still offers an attractive 2.9% dividend yield at current levels.

The focus on building resilient high-margin wealth management revenues should also help smooth earnings over the long run.

As macro certainty improves in 2023, analysts broadly expect financial stocks – with Goldman at the helm – to regain their momentum.

Outlook Going Forward Still Positive Despite Near Term Uncertainty

With wealth management gains unable to fully offset market-driven declines recently, Goldman is poised to continue facing earnings pressure as long as markets remain unstable.

However, analysts highlight Goldman’s stock as an opportunity, with upside potential if negative trends reverse. And the wealth focus provides optimism for the future.

As economic visibility increases, volatility should dampen – allowing deal flow and trading activity to recover. And Goldman stands ready to capture renewed growth across its diverse business lines.

But uncertainty still abounds regarding just how sharp a potential global downturn may be. Facing an earnings decline and ongoing macro concerns, analysts forecast Goldman shares to remain rangebound near current levels in coming months.

Yet the general view is optimism – seeing light at the end of the tunnel as macro uncertainty eventually clears. And Goldman’s strong position across key financial sectors keeps the bank’s long term earnings outlook positive.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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