Goldman Sachs (GS) is an American multinational financial services firm. The banking giant operates a range of services, including investment banking, wealth management, trading, and loan origination. I am bearish on the stock.
Non-Interest Bearing Backdrop
There was always going to be a backdrop in non-interest-bearing banking activities, with stimulus-induced liquidity being the central driver to financial markets during the past two years.
It’s evident that we’ve entered an inflection point in which corporate acquisitions and equity investments have tapered. According to the Financial Times, big American banks have experienced a $4.6 billion drawdown in year-to-date equity raising revenue versus this time last year.
Equity market-making activities come in ebbs and flows, meaning that it’s a cyclical business activity. Goldman Sachs’ fourth-quarter earnings report states that the firm’s market-making revenue dropped by $1.67 billion during the quarter, while commissions and fees revenue also slipped by $7 million. The data points combined suggest that reduced deal flow could soon spill over into other non-interest-bearing activities.
Debt Market Underperformance
Stock market participants have been disappointed by the federal reserve’s conservative monetary policy. The broad-based assumption by economists was that the Fed would blitz in 2022 by raising interest rates aggressively to curb inflation, which clearly hasn’t happened as interest rates have only risen by 25 basis points.
Banks thrive in higher interest rate environments as they benefit from higher spreads on debt as well as lower erosion of outstanding debt due to lower inflation.
Although Goldman’s fourth-quarter interest-bearing activities added a quarterly surplus of $240 million, many analysts remain concerned about the segment’s health. The consensus was that banking stocks would benefit from robust debt markets in 2022 to offset any slowdowns in other segments, which hasn’t happened.
A Possible Value Trap
It’s easy to conclude that GS stock is undervalued based on most of the stock’s price multiples. For instance, relative to its historical multiples, its P/E ratio is trading at a five-year discount of 42.6%, and its P/S ratio is at a discount worth 19.1%.
The issue remains that banking stocks tend to trade on their price-to-book-value ratios because the banking business is reliant on the trade of liquid assets with easily discoverable market prices.
Goldman’s stock price is currently trading at 1.14x its book value, suggesting that it’s an overpriced stock with a value trap if one considers obsolete valuation metrics.
Struggling to Find Momentum
GS stock is struggling to find consistent momentum, as indicated by the fact that it’s trading below its 50-, 100-, and 200-day moving averages. In addition, Goldman’s RSI of 47 is in midpoint territory, suggesting that there’s no real unjustified sell-off in the short-run but rather a complete disinterest from investors.
Wall Street’s Take
Turning to Wall Street, Goldman Sachs has a Moderate Buy consensus rating, based on 10 Buys and five Holds assigned in the past three months.
The average Goldman Sachs price target of $448.14 implies 33.2% upside potential.
Concluding Thoughts
Goldman Sachs stock is in overvalued territory, and a cooldown in non-interest-bearing activities isn’t helping its cause. Additionally, lackluster monetary policy by the Federal Reserve has caused a lag in Goldman’s interest-bearing activities versus what was anticipated.
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