Episode 10: Goldman, BlackRock, consumer sentiment and inflation

This is before and after from Refinitiv. I'm your host, Johanna Botta. 

As investors, we all know that we can make big profits or losses around major economic and corporate data releases. So in this show we're going to look at which ones could move markets in a meaningful way. This week, we'll get the first batch of market moving corporate earnings reports. Banks will be reporting, and often as the bank stocks go, the market goes. Last year, the banks were one of the best performing sectors, shrugging conventional wisdom about what bank securities should do when rates are going lower. 

While all the bank stocks tell a unique story, this week, we're going to focus on investment banking titan Goldman Sachs. 

While David Solomon has focused on broadening the bank's revenue model, their earnings are still deeply tied to Capital Markets. So while we'll get a nice look at the broader earnings environment for financial companies, traders get a unique view of what asset classes are driving the story and the overall health of trading in general. 

Last year, Goldman's shares were on fire. The stock rose 37.5% and finished the year on highs. If we look back long term, you can see that Goldman's share price, even pre great financial crisis, had trouble clearing the 250 level. And here we're looking to beat the high level that the stock reached in early 2018. 

Of course, the world has completely changed since then, and most importantly, the Fed went from raising rates, which tends to be good news for banks to cutting them again. So what's the bottom line? What will drive the next move? Is there a key catalyst that will appear in Goldman's earnings report that can justify breaking the 250 resistance? The bank has shifted its model to growth areas. The investment banking footprint has expanded, as has their customer base, across different spectrums of financing. Last quarter, they showed a bit of growth in some traditional business lines that they depend on. For example, FIC trading in the third quarter was up 7.9% year on year and equities sales and trading was up 4.6% for that same period, bucking a negative trend for equities across the rest of the U.S. Banks. 

Along with growing the right parts of its business and attracting a more diverse customer base, Goldman has more closely tethered their fortunes to that of the growth elements of the U.S. economy. So, you could view it as a higher beta financial play on the continuation of the U.S. growth story. 

But what's the likelihood that Goldman's stock continues to grow as well? Normally, when a share rallies 37% the previous year, you wouldn't expect the word cheap to come to mind. But with price earnings ratio of 10 in book value of one point one seven, Goldman remains relatively inexpensive. Perhaps it's because the firm's exposure to markets and investment banking is higher than its peers. For instance, Goldman gets more than 80 percent of its revenue from investment banking, compared to 32 percent of JP Morgan and 22 percent at Citi. And that could have been a good thing during the most recent quarter. 

The market has been very strong, and Goldman should reflect that in their numbers. Expectations are for five dollars, 49 cents a share, and a total revenue of eight point five billion. If Goldman beats on the top line in earnings growth comes from investment banking, or any of their new growth initiatives, expect the stock to top the 250 level. And that's about what the options markets are predicting, a 3 percent rise in the day after earnings. If its numbers are mostly positive and strong, and the stock does poorly, this would be a sign of buying exhaustion for growth stocks in general in the U.S., and you might end up watching the markets follow Goldman's lead. 

BlackRock is another financial company that will help round out the picture for the sector. The asset manager trades at an industry high with a price earnings ratio of 20, and is perhaps the best example of those who have benefited from the passive investment craze. With nearly seven trillion dollars under management, BlackRock is the big fish. But with this massive power comes greater accountability and, of course, scrutiny. Many see the market's current ecosystem as unevenly balanced thanks to passive flows that have driven returns. You can see that imbalance If you look at how companies that are listed in key stock markets outperform their peers, the share prices of those companies rise in part because firms like BlackRock buy them. And they buy into them through investment funds, to try and replicate the behavior of the markets where those companies are listed. 

And much like our previously discussed case for Goldman, BlackRock's earnings are even more closely tied to the market, as fees based on AUM are everything. 

This will be BlackRock's first quarterly earnings report since some of America's largest discount brokerages cut their commission levels. So it will be interesting to see whether the firm felt the effect of those changes. 

The Bottom Line: last quarter, BlackRock beat expectations with one point two billion dollars in earnings, against an estimate of one point zero eight. Fixed income, cash and inflows from alternative strategies led BlackRock to outperform the industry with total inflows of eighty four billion. But some investors may ignore any positive news in the firm's numbers, if they already expect good earnings because the overall market is performing so well. And given the pressure of fees across its industry, BlackRock may need to show it has attracted more inflows than any of its competitors, if a rally in the stock price is to be justified. 

The new payroll numbers came in slightly weaker than expected while the unemployment rate was in line with estimates. And since the payroll data was not exactly earth shattering, neither was the market reaction. However, the numbers did confirm the consensus opinion that the economy will slow slightly. And that, in turn has strengthened another consensus view that the Fed will not change rates in the near term. 

Perhaps the only real interesting data nugget came in the average hourly earnings growth. The month on month growth came in a point one versus the expected point three. And that dealt a blow to the case that wage growth might spark inflation. 

The bears will argue that the low unemployment rate, coupled with these weak hourly earnings, are signs that real wages, which reflect consumer’s purchasing power, are under serious pressure. But at least the bulls can claim that the threat of wage inflation, which could force the Fed to take a more hawkish stance, is off the menu at this moment. 

Neither hot, nor cold, that's an outlook that has supported markets over the last decade. And given the current backdrop of aggressive valuation, this can be considered to be a good thing for market stability. 

There it is. Goldman Sachs and BlackRock earnings, in before and U.S. payrolls in the after. Refinitiv data throughout. 

This has been the Tuesday episode of Before and After. Please be sure to like, subscribe, and hit the notification bell. Share us with your friends, and we'll be back on Friday.