Commodities have been offering awful yields, bond rates are rising, and European stocks show weaker fundamentals due to the whole European economic zone being in a state of recession. The Goldman Sachs investment management division was able to grow revenue 12% in light of the macro-environment, and fund-flows.
Source: Goldman Sachs
The most interesting trend is the sudden improvement in the equity underwriting. The rallying stock market has caused for a sudden influx in the number of IPOs that will be coming onto the market. Total underwriting has increased 69%. This has caused the total investment banking revenue to jump by 36%.
The higher number of underwritings imply that a huge wave of IPOs will be hitting the stock market soon. More IPOs translates into higher trade volume, which could have a positive earnings effect for the Nasdaq OMX Group, NYSE Euronext, along with the CME group.
Expect a ton of Motley Fool updates on the upcoming IPOs as there will be plenty of companies raising capital in the stock market. Hopefully, underwriters will be able to avoid another Facebook Inc (NASDAQ:FB) IPO disaster. That being the case, I anticipate higher rates of underwriting in the foreseeable future.
Companies will attempt to go public in a stock market up-trend because companies are better able to raise capital when investor sentiment is positive. So, expect Goldman Sachs to generate higher revenue from investment banking going forward.
Conclusion and outlook
I remain highly optimistic on Goldman Sachs Group, Inc. (NYSE:GS) going forward. The segment data implies that Goldman Sachs is well-positioned. Despite the volatility in the currencies, bonds, and commodity markets, Goldman Sachs is able to make-up for it with improving results in the investment banking, asset management, and trading division of the company.
The company is well-managed, as Lloyd Blankfein has been able to cut costs aggressively, while maintaining stable revenue growth. The wild-card is the prop-trading desk at the bank, and whether or not it can sustain its positive momentum. The decline in litigation related issues will cause litigation related expenses to decline, and this should boost investor sentiment.
Analysts anticipate Goldman Sachs Group, Inc. (NYSE:GS) to grow earnings 6.91% per year over the next five years. I’m a little more optimistic than that, and while I understand the conservatism analysts have towards the bank, the underpinning performance of Goldman Sachs deserves reconsideration.
Goldman Sachs will be able to sustain higher earnings per share growth through share buy-backs, cost-cutting, and organic revenue growth. The business environment is improving due to the rallying stock market, and fund inflows. It also helps that Goldman Sachs’ trading division has heavy exposure to stocks, which is why the company was able to report such strong earnings.
The article This Mighty Bank Looks Set to Get Even Better originally appeared on Fool.com and is written by Alexander Cho.
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