This article first appeared on GuruFocus.
Goldman Sachs, the investment bank and asset manager (NYSE:GS), posted an 18.7% annualized return on common equity for the third quarter, with shares at $907.46, up approximately 1.5%, at 10.25am on October 13. That is a strong quarter. The bigger question is whether Goldman can keep delivering those returns when trading activity loses steam.
Goldman’s earnings release reported $18.68 billion in revenue, $5.29 billion in net earnings and $17.01 in diluted earnings per share. The trading engine did plenty of heavy lifting. Reuters reported that equities revenue jumped 72% to $6.44 billion, while fixed-income, currency and commodities revenue slipped 1% to $3.47 billion. Equities powered ahead. The rest of trading barely budged.
The valuation picture leaves less room for disappointment: shares sit 8.36% above the $837.45 GF Value estimate, suggesting the price already reflects some optimism. Goldman can turn busy markets into big profits, but investors should be careful about treating a trading surge as a permanent earnings base. Asset and wealth management could help smooth the ride. The test is whether recurring revenue can sustain strong returns when client activity cools.
