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Morgan Stanley and Goldman Sachs kick-off US fourth-quarter bank earnings

By Jenny McCall

13:03, 10 January 2023

A image of the Goldman Sachs logo on a mobile phone
Will GS have a soft landing in 2023? - Photo: Getty Images.

We kick off the new year with a bang, as corporate earning season starts on Friday. Major banks from JP Morgan (JPM), to Wells Fargo (WFC) and Citigroup (C) lead this week and then we have Morgan Stanley (MS) and Goldman Sachs (GS) reporting on 17 January.

2022 was a tough year for banks and equities, so what can we expect from MS and GS next week?

MS stock price was down 13% in 2022, a stark contrast to the previous year, when it surged 43%. GS share price plummeted 10%, versus 2021, when it was up 45%.
Rising inflation, interest rate hikes and a troubling macro-economic environment has caused a decline in stocks globally.

According to Factset, analysts expect S&P 500 (US500) companies to report their first year- over-year earnings decline since 2020.

So, as major banks start to release their quarterly earnings and investors look to how they will perform in 2023, the role of central banks and the decisions made, will play
heavily into how banking stocks like GS and MS perform this year.

“Central banks and policymakers are trying to manage inflation on one hand but do so without tipping heavily indebted economies into recession on the other (all while
keeping an eye on their currencies and financial market stability for good measure),”AJ Bell investment director Russ Mould.

“Given that central banks made a mess of it with their call that inflation would be ‘transitory,’ it would be logical to apply a large dollop of salt to their claim that they
can engineer a ‘soft landing’ as they rein in inflation.”

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Goldman Sachs (GS) share price chart

Will GS have a soft landing in 2023?

GS enjoyed a boom in 2021 and at the start of 2022, as mergers and acquisitions (M&A) peaked after the Covid pandemic. However, takeovers have fallen and interest rates
have risen, leading to company valuations declining.

As one of the world’s biggest investment banks, GS has already started 2023 with its biggest rounds of redundancies this week, and will cut over 3,000 jobs in a bid to save costs. CEO, David Solomon informed staff in December that the job cuts were critical if it were to “weather the headwinds,” caused by rising rates.

It’s also been reported that GS is considering cutting as many as 4,000 jobs, as well as making cuts of 40% to its bonus pool.

Solomon maybe hoping the job cuts will offer a positive sign to its bank's shareholders, ahead of its earnings release next week.

GS's earnings report will be for its fourth-quarter and according to Zacks investment Research - based on 8 analysts forecasts, the consensus earnings per share (EPS) forecast for the quarter is $6.13. The reported EPS for the same quarter last year was $10.81.

Daniela Hathorn, senior analyst at Capital.com said: “In Q4 banks are expected to report higher net interest income given the higher interest rate environment but challenging market conditions have likely reduced dealmaking, something that the banking giants have already warned about.”

“This means that market expectations are probably pretty low going into the start of this earnings season, meaning there will be a good chance for greater upside if the numbers don't seem as bad as expected or even manage to come in-line or beat expectations.”

However, GS is trying to get its 2021 glow back.

The company is one of the major players in the investment banking (IB) business and is implementing measures to diversify its operations.

GS is making efforts inorganically to boost asset management and wealth management businesses while expanding its digital consumer banking platform –Marcus by Goldman Sachs,” analysts at Zacks Research wrote in a note.

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“In August 2022 GS acquired robo-advisor NextCapital. In April 2022, Goldman closed the acquisition of Dutch asset manager NN Investment Partners from NN Group N.V., while in March, the company closed the buyout of GreenSky. In 2020 and 2019, the company acquired Folio Financial and United Capital, respectively.”

Experts believe these inorganic growth efforts will help diversify the fee-revenue base and offer top-line stability.

Will M&A's give GS the edge in 2023?

Nevertheless, GS IB business fell in the first nine months of 2022, caused by a decline in industry-wide M&A transactions.

But some analysts are still optimistic.

“Goldman’s solid position in worldwide announced and completed M&A's will likely give it an edge over its peers. Robust client engagement, backed by digital disruption and transformation trends, and its decent investment banking backlog are other tailwinds,” Zacks analysts said.

“Also, GS looks undervalued with respect to price-to-earnings (P/E) and price-to-book (P/B) ratios. The stock has a P/E (F1) ratio of 10.89, which is lower than the industry
average of 14.50. Also, its P/B ratio of 1.07 is below the industry average of 1.56.”

Morgan Stanley (MS) share price chart

Will MS stock gain in 2023?

GS rival, MS has also had a turbulent 12 months. But the start of 2023 has proven to be a positive one so far for the investment bank.

MS stock has been up 3% so far this year and on Monday the stock outpaced the S&P 500’s daily loss of 0.08% and closed at $87.64, making a +0.09% move from the previous day.

However, over the last four weeks, the MS share price has been down 2%, lagging the finance sector's loss of 1.02% and the S&P 500’s loss of 1%, for the same period.

Investors will be hoping for a strong start to the year, as MS approaches its earnings release.

“In that report, analysts expect Morgan Stanley to post earnings of $1.32 per share. This would mark a year-over-year decline of 36.54%,” Zacks analyst said.

“Meanwhile, the Zacks Consensus Estimate for revenue is projecting net sales of $12.17bn, down 16.18% from the year-ago period.”

But analysts have also highlighted investors should note that MS has a forward P/E ratio of 12.13 right now. Its industry sports an average forward P/E of 12.18.

“So we might conclude that Morgan Stanley (MS) is trading at a discount comparatively,” Zacks Research states.

Next week will be a critical time for MS and GS. Both stocks will release quarterly earnings releases, which will give investors a gauge of where these banks are heading in 2023. But shareholders and those looking to trade these stocks should be aware that the macro-economic environment will also be a key indicator as to where stocks like these are going and whether 2023 will be a promising one for them.

Markets in this article

C
Citigroup
65.25 USD
-2.38 -3.520%
GS
Goldman Sachs
486.91 USD
-13.91 -2.780%
JPM
JPMorgan Chase & Co (Extended Hours)
210.03 USD
-6.85 -3.160%
MS
Morgan Stanley
104.65 USD
-2.24 -2.100%
US500
US 500
5547.8 USD
-40.1 -0.720%

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