Goldman Sachs' (NYSE: GS) earnings show that Wall Street is one of the big winners from the coronavirus crisis. The result wasn't too surprising considering that JPMorgan's (NYSE: JPM) trading operations posted a record gain, while its banking business posted a loss.
One factor was that traders were able to make loads of money front-running the Federal Reserve's announcement of its intention to purchase corporate bonds. While the Fed announced this in late March, it didn't actually buy any till mid-June. By this time, corporate bonds had already recovered their entire decline and were at record highs.
Inside the Numbers
Goldman reported $2.42 billion in profit which was higher than expectations of $1.45 billion. Revenue came in at $13.3 billion which was higher than estimates of $9.8 billion. Goldman is unique in that it's a pure Wall Street bank focused on investment banking, trading, and wealth management with minimal exposure to the consumer. It suffers somewhat from the poor economy, but its trading operation benefits from low rates. It also won't have to deal with losses due to consumers and small businesses defaulting on loans.
Goldman's trading desk also benefitted from the increased volatility in financial markets which led to higher volumes and more transactions. The volatility also led to higher spreads between the bid and ask which creates more profits for market-makers. The Fed's actions to support credit markets also led to more debt issuance which led to strong profits for the bank's investment banking division.
Overall, all of the bank's primary divisions produced more revenue this quarter than in 2019. It's a clear signal that the Fed's actions, although designed to support the real economy, will certainly benefit the financial economy, and the companies that are most connected to it.
Stock Price Impact
The stock gapped up 5.5% but ended the day 1.5% higher as traders took profits amid a generally risk-on day and strong day for financials. This was similar to JPMorgan as investors don't see the performance as being repeatable. Given that volatility has significantly dropped in addition to bond issuance, it's likely that trading and investment banking revenue will be lower.
So although Goldman had an incredible quarter and basically profited from the pandemic and the Fed's response, investors don't see it as a repeating occurrence. Otherwise, the stock would be significantly higher.
Unlike banks connected to Main Street, Goldman's stock has had a much more meaningful recovery off its March lows, as it's more than 50% higher and 14% off its pre-coronavirus peak. In contrast, the Financials sector ETF (NYSE: XLE) is 33% off its March lows and 23% off its pre-coronavirus peak.