Shares of Goldman Sachs (GS -0.96%) fell after it released first-quarter earnings results that disappointed investors.
Meanwhile, many of Goldman's peers saw their shares rise pretty significantly after they reported better-than-expected earnings. While Goldman didn't hit it out of the park in Q1, the company's earnings weren't as bad as investors might have initially thought. Here's why.
It's all relative
A big disappointment for the market was Goldman's performance in its fixed income, currencies, and commodities (FICC) trading business, which is one of its core businesses.
In the first quarter of the year, bond yields were extremely volatile. Goldman Chief Executive Officer David Solomon said that over the past 25 years, there have only been four days in which the yield on the two-year U.S. Treasury bill moved by a half-percent or more within a single day. One was in September 2008 during the Great Recession and three occurred in March after the crisis that led to the collapse of several banks in the U.S. and Europe. Because of this, there was a lot of activity and opportunity in fixed-income trading as investors reacted and repositioned their portfolios.
Goldman generated $3.9 billion of FICC trading revenue in Q1, which Solomon called a strong quarter and which was actually the bank's eighth-best quarter ever for FICC trading. But analysts had expected Goldman to generate $4.16 billion of FICC revenue. Additionally, FICC revenue at Goldman fell about 17% year over year, while most of Goldman's peers came in little changed or even up slightly from the first quarter of 2022, which was a very strong quarter in its own right.
| Bank | FICC Trading Revenue Q1 2023 (millions) | FICC Trading Revenue Q1 2022 (millions) | FICC Trading Revenue Q1 2021 (millions) |
|---|---|---|---|
| Goldman Sachs | $3,931 | $4,723 | $3,731 |
| JPMorgan Chase | $5,699 | $5,698 | $5,761 |
| Bank of America | $3,440 | $2,708 | $3,242 |
| Morgan Stanley | $2,576 | $2,923 | $2,966 |
| Citigroup | $4,454 | $4,289 | $4,550 |
Data source: Bank earnings reports.
As you can see in the chart above, while FICC trading revenue in Q1 was down year over year, FICC revenue at Goldman surged in the first quarter of 2022 on a year-over-year basis, while most of Goldman's competitors came in little changed or down year over year.
While fixed-income products were all the rage in this recent first quarter, Solomon said: "We had much more significant outperformance in the first quarter of 2022 because of our commodities business and the breadth of our commodities business. So if you remember back in the first quarter of 2022, the war with Ukraine started, there was more volatility in commodities and clients were very active in commodities."
No reason to be concerned
While the underperformance in trading in the quarter grabbed some headlines, I'm not overly concerned about the miss on estimates. Goldman will continue to have one of the pre-eminent trading businesses in the world and if you compare the bank's FICC revenue between 2023 and 2021, only Goldman and Bank of America had FICC revenue growth.
Solomon also hinted at a strong quarter to come, noting that clients in Goldman's FICC business are "active at the moment," so it looks like trading should remain strong in the foreseeable future.
