Will Goldman Sachs Earnings Mimic JPMorgan and Bank of America?

Goldman Sachs (NYSE: GS  ) will release its quarterly report tomorrow morning, and after fairly favorable news from JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) in their reports, investors are hopeful Goldman Sachs earnings will post the same favorable gains. With the stock near its best levels in more than four years, the investment bank will have to demonstrate to investors that it will be able to weather whatever market storms might occur in 2014 and beyond.

More than many of its peers, Goldman has struggled lately from the specter of increased regulation and its potential impact on returns on equity. Yet, even with the challenges Goldman faces, it has still managed to navigate well in a difficult environment, even as rising interest rates bring a huge wave of corporate debt refinancing to an abrupt halt. What will it take for Goldman to find growth and boost its efficiency going forward? Let's take an early look at what's been happening with Goldman Sachs over the past quarter, and what we're likely to see in its report.


Source: OTA Photos.

Stats on Goldman Sachs

Analyst EPS Estimate

$4.21

Change From Year-Ago EPS

(25%)

Revenue Estimate

$7.71 billion

Change From Year-Ago Revenue

(16.5%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Goldman Sachs' earnings really shrink this quarter?
In recent months, analysts have had mixed views on Goldman Sachs' earnings, cutting their fourth-quarter estimates by $0.30 per share, but boosting their full-year 2014 projections by $0.22 per share. The stock has kept moving higher, gaining 12% since mid-October.

Goldman's third-quarter results back in October showed some of the difficulties the investment bank has faced in the current financial environment. Revenue plunged, following JPMorgan and Citigroup (NYSE: C  ) lower, as proprietary trading operations saw a 32% drop in revenue. Goldman, in particular, is sensitive to the fixed-income market, which saw dramatic moves as a result of the Federal Reserve's initial steps toward exiting its bond-buying efforts. Yet, cost-cutting measures helped Goldman avoid a drop in net income, with earnings per share actually rising slightly from year-ago levels.

So far this quarter, we've seen similar issues affect bank earnings, but the news has generally been good overall. JPMorgan saw its net income fall 16%, with its corporate and investment banking division seeing a big 21% drop in revenue that cut profits by more than half. Falling debt-underwriting fees weighed on its investment banking fee income, but strength in other areas helped keep investors positive about JPMorgan's overall prospects. For Bank of America, solid performance from its global wealth and investment management segment helped boost asset management fees by 15%, with positive asset flows setting new records and helping the company post a big overall jump in net income.

Investors remain enthusiastic about Goldman's future prospects. Goldman has a long history of taking maximum advantage of changing conditions in the capital markets, whether the opportunities exist in fixed-income, equities, commodities, or other markets. By contrast, JPMorgan recently announced that it would exit its commodities business amid calls for tighter regulatory scrutiny of bank activity in the space.

One source of uncertainty for Goldman stems from the implementation of the Volcker Rule, which aims to eliminate proprietary trading among banks. So far, early signs of how the rule might actually take effect have given shareholders hope that Goldman and JPMorgan will survive its implementation, although recent delays regarding when the rule will become effective have also given Goldman stock a reprieve.

In the Goldman earnings report, watch to see if the company gives any hints about whether it will seek to increase its dividend in the near future. With a yield of just 1.3%, dividend investors would applaud a greater emphasis on returning capital to shareholders, and a dividend increase would signal yet another step forward for Goldman in its long path toward a full recovery from the financial crisis.

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