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Investors don’t believe what they are seeing on Wall Street

  • Shares of Wall Street banks, notably Goldman Sachs, don’t reflect solid recent performance; investors may be too focused on the past

Investors just don’t seem to believe the good times can continue for Wall Street.

Take Goldman Sachs for instance. Last week it reported record quarterly earnings per share, which were 75% better than consensus forecasts. It also had its highest quarterly return on equity, an annualized 17.5% rate, in a decade. Yet in the days since the stock has edged lower, by more than 2% since its report.

In the first three quarters of this year, across Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley investment banking and trading revenues are up 34% versus the same period last year, according to figures compiled by Jefferies analysts.

The years of depressed revenue that accompanied the last economic recovery may be lingering in the minds of investors. Wall Street banks suffered from an onslaught of new regulation, as well as depressed trading volumes as Federal Reserve bond-buying suppressed market volatility. But while this year may be anomalous, it doesn’t mean there isn’t room for long-term improvement. “The question should be what is the expectation of growth off a year like 2019," said Wolfe Research analyst Steven Chubak. “A lot of the regulatory headwinds are already baked in."

There are also some reasons activity could still be relatively good. A postelection U.S., especially if there is a change in party control, could see a flurry of corporate activity to adapt to changes in tax, spending and regulatory policy. That will likely mean revenue opportunities for investment banks. Even an economy on pause could still see companies need to rework complex structured debts they took on this year, including with equity, perhaps through vehicles like special-purpose acquisition companies.

The election does bring risks to activity, as traders may reel in positions to account for policy risk. But corporates are forging ahead, with more than $1 trillion worth of merger deals struck globally in the third quarter, according to Refinitiv. Those deals will generate advisory revenue for banks when they close next year. M&A revenues are the only Wall Street business down this year, according to Jefferies.

Goldman Sachs also noted that next year’s transition away from the Libor rate benchmark will be big for clients. That can generate issuance, hedging and other activity that could help make up for a lack of volatility in core interest rates set near zero.

Analysts peppered Goldman’s earnings call with questions about its own M&A. Markets are a bit fuzzy on this: Investors sometimes act as if they don’t like dilutive acquisitions for banks, yet can be frustrated when they don’t do them. This dynamic may weigh on Goldman’s shares for now. It also could keep Morgan Stanley shares from fully realizing the benefits of its own deals, with E*Trade Financial and Eaton Vance, for a while.

Goldman Sachs is now trading at around nine times next-12-month earnings, down a bit from where it began the year, according to FactSet. Morgan Stanley remains just under 10 times. This is despite surging returns and, in Morgan Stanley’s case, acquiring a higher-multiple business. Banks in the S&P 500 overall trade at roughly 12 times.

Virtually all bank stocks are on sale, but a lot of that is predicated on credit risk and depressed interest income, where capital-markets-centric banks are less exposed. Goldman and Morgan Stanley seem to be in a better position to outperform expectations.

This story has been published from a wire agency feed without modifications to the text

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