This has been a year for the history books so far. Inflation is at its highest level in 40 years. Interest rates worldwide are rising at their fastest pace in 30 years. To cap it all off, the S&P 500 index is off to its worst start in 50 years.
In response, many companies are waiting to go public to avoid market volatility, and initial public offerings (IPOs) have fallen dramatically. Investment banks like Goldman Sachs (GS -0.23%) have seen demand for their services dry up. Here's how Goldman's business has been affected.
IPOs went from one extreme to the other
When markets sold off in March 2020 when the pandemic first emerged, central banks and federal governments combined to provide unprecedented economic stimulus. This set off a favorable environment across asset classes that lasted through the end of 2021.
During this time, companies went public rapidly, and IPOs skyrocketed. According to FactSet, over 1,000 companies went public last year, raising $317 billion.
This year, investors have grown concerned about inflation and rising interest rates. Throw in geopolitical uncertainty, and you have a recipe for volatile markets. Companies are hesitant to go public and prefer to wait until market conditions support higher valuations and investor confidence is high. This year hasn't seen that. As a result, only 92 companies have gone public so far, while raising $9 billion, per FactSet.
Image source: FactSet Research Systems.
Here's how Goldman Sachs' earnings are affected
Goldman Sachs provides clients with investment banking services, helping companies complete merger and acquisition (M&A) deals, raise debt, and go public through IPOs. Goldman is one of the best investment banks globally and consistently ranks as one of the top companies in M&A deals and equity-related offerings.
The company was a big winner last year, and its $59 billion in revenue represented a two-year growth of 62%. Its investment banking more than doubled during this period as well.
Through six months this year, Goldman's total revenue has fallen 25%, and its net income is down 45%. Its investment banking revenue is down 38%, with the underwriting business being hit the hardest. Equity underwriting, through which it helps companies going public through IPOs, was down 86% from last year. Meanwhile, debt underwriting, how it helps companies raise money through debt, was down 34%.
Image source: Getty Images.
What to expect
Investment banking is a highly cyclical business, vulnerable to economic conditions, and is a big reason these companies trade at a lower multiple. Goldman Sachs currently trades at a price-to-earnings ratio (P/E) of 7.2, its cheapest valuation in years. Investment banks will likely see headwinds in the near term as long as market volatility persists and companies continue waiting for the right moment to go public.
Once the skies clear, Goldman Sachs could be in a solid position. According to chief financial officer Denis Coleman, the investment banking backlog is down from its peak last year but is still higher than at any point in 2021 -- a good sign that the firm could bounce back in a big way once conditions improve.
