We expect The Goldman Sachs Group, Inc. (GS) to beat earnings expectations when it reports third-quarter 2014 results before the opening bell on Thursday, Oct 16.
Why a Likely Positive Surprise?
Our proven model shows that Goldman has the right combination of two key ingredients to beat earnings.
Positive Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.25%. This is a very meaningful and leading indicator of a likely positive earnings surprise for the company.
Zacks Rank #3 (Hold): Note that stocks with a Zacks Ranks #1 (Strong Buy), 2 (Buy) and 3 (Hold) have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Goldman’s Zacks Rank #3 and ESP of +1.25% makes us confident of an earnings beat on Oct 16. Moreover, Goldman delivered positive earnings surprises in the trailing four quarters, with an average earnings beat of 19.5%.
Factors to Influence Q3 Results
While overall trading volumes remained soft during the quarter, a late pick-up in volatility in September might have partly offset the decline in Goldman’s trading revenues. However, a net decline in capital market revenues is expected, as the downtrend in fixed income, currency and commodities continued.
Feeble mortgage activities owing to uncertainty over interest rates should also be reflected in the results. However, investment banking should significantly support the bottom line due to continued strength in M&A and IPO activities during the quarter.
Aggressive cost control through streamlined operations should contribute to the bottom line. Further, a favorable asset market backdrop as well as encouraging macroeconomic factors – falling unemployment, progressive housing sector and flexible monetary policy – is likely to have lent some support to the financials of banks.
During the quarter, Goldman jumped on the bandwagon of Wall Street banks, which are targeting the fastest growing market of actively managed exchange-traded funds (ETFs). The bank has sought the U.S. Securities and Exchange Commission’s (SEC) approval to foray into the ETF market with a series of active ETFs.
,along with other major global banks, has reduced its outlook for China’s economic growth. Goldman reduced the real gross domestic product rate to 7.1% from the previous forecast of 7.6% for 2015. The change in the bank’s outlook comes on the heels of concerns over slower growth following weak economic activities.
Though Goldman has maintained the 2014 expected growth rate at 7.3%, it is expected to be lower than 7.7% in the prior year. The bank expects the third and fourth quarter growth forecasts to reduce to 7.1% from 7.3% and 7.2%, respectively.
Given the competitive environment and stringent regulatory landscape, global banks are facing tough challenges in controlling costs and increasing revenue. This is certainly restricting their bottom-line growth. To make matters worse, a number of major banks have been encountering legal overhangs in recent times. Therefore, amid ongoing global economic concerns, slow growth in China – the world’s second-largest economy – would be detrimental to the banks’ financials.
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 1% to $3.21 per share over the last 7 days.
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:
BB&T Corporation (BBT) has an earnings ESP of +1.41% and carries a Zacks Rank #3. It is scheduled to report its third-quarter results on Oct 16.
Capital One Financial Corporation (COF) has an earnings ESP of +2.08% and carries a Zacks Rank #2 (Buy). It is scheduled to report its third-quarter results on Oct 16.
Hudson City Bancorp, Inc. (HCBK) has an earnings ESP of +16.67% and carries a Zacks Rank #3. It is scheduled to report its third-quarter results on Oct 22.
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