Goldman Sachs Earnings: Outstanding Results Underpin Market Exuberance

Key Morningstar Metrics for Goldman Sachs

• Fair Value Estimate
  : $730.00
• Morningstar Rating
  : ★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : High

What We Thought of Goldman Sachs’ Earnings

Goldman Sachs GS reported sensational second-quarter earnings, with annual revenue growth of 39% and EPS growth of 92% on the back of 53% growth in the firm’s global banking and markets business. Shares surged during July 14 trading.

Why it matters: For long-term investors, Goldman Sachs’ second quarter represents an interesting exercise in avoiding the pitfall of chasing recent performance and of extrapolating recent results in a cyclical industry too far into the future.

• On one hand, the firm posted video game numbers (almost unbelievable results), with growth of 55% in investment banking, 53% in the consolidated banking and trading business, and 740 basis points of operating margin expansion.
• On the other hand, it sits in inherently cyclical, mean-reverting businesses like investment banking and trading, which have historically grown at a low-single-digit and high-single-digit annual clip, respectively, compared with 24.5% and 20.9% between 2024-26 (projected).

The bottom line: We plan to maintain our $730 fair value estimate after digesting results, but this is largely due to an increase in our cost of equity for the bank, to 10.3% from 9.5%, as we calibrate our cost of capital assumptions across our global coverage. Adjusted for this, we would have raised our fair value by a low-double-digit percentage on the back of incredible results and stronger near-term free cash flow projections.

• Qualitatively, the bank continues to fire on all cylinders, growing wallet share with key institutional clients and its profitable prime brokerage operations (up an eye-popping 91% annually) with particular improvement in Asia. Its OneGS initiatives continue to bear fruit, cross-selling services to clients across the integrated bank, including 900 referrals from investment banking to the firm’s growing wealth management business.