So far in 2024, Goldman Sachs (GS) stock has climbed about 40%. This impressive rally has lifted its market capitalization to approximately $170 billion. The year-to-date GS stock move is nearly double the 22% gain posted by the S&P 500 index so far this year. In my view, the sizable stock rally has made Goldman fully valued. There looks like diminished capital gains potential for the stock over the next 12 months. I hold a neutral on GS stock.
Goldman Sachs Delivered Strong Results in Q3
On October 15th, Goldman Sachs released its financial results for the third quarter ended September 30, 2024. The company’s net revenue grew by 7% year-over-year to $12.7 billion during the quarter. The top-line growth was fueled by the Global Banking & Markets segment, whose net revenue rose to $8.6 billion. That result was due to strength in investment banking from flourishing capital markets, as well as higher net revenue from credit products and mortgages. The ongoing bull market also benefited Goldman Sachs’ Asset and Wealth Management segment. Coupled with net inflows for the 27th consecutive quarter per CEO David Solomon, this pushed assets under supervision to beyond $3 trillion. As a result, this segment’s net revenue jumped by 16% over the year-ago period to $3.8 billion for the third quarter.
Strength in these segments was partially offset by a poor result in the Platform Solutions segment, where net revenues declined 32% (as compared to Q3 2023) to $391 million. This was largely attributable to lower net revenue from the General Motors credit card program.
Focusing on the bottom line, Goldman Sachs’ diluted earnings per share (EPS) climbed 53.6% over the year-ago period to $8.40 in the third quarter. This large increase was partially due to easier comps from Q3 2023.
A substantial improvement in Goldman Sachs’ efficiency ratio (total operating expenses divided by total net revenue) was another catalyst for the company. An uptick in net revenue and disciplined cost management helped the efficiency ratio improve by over 150 basis points to 65.5% for the quarter.
A Favorable Fundamentals Outlook
Moving forward, Goldman Sachs’ near-term future looks bright. There are a few factors working in the company’s favor although, despite these strengths, I’m neutral on the stock.
It’s beneficial that the two-and-a-half-year interest rate-hiking cycle came to an end last month. The Federal Reserve cut the federal funds rate by 50 basis points to a range of 4.75% to 5%. Morningstar’s most recent economic forecast anticipates that the Federal Reserve will lower the federal funds rate to the 2%-2.25% band by the end of 2026.
Interest rate cuts can provide companies with easier access to financing that can be used to drive growth. This can power more investment banking activity (benefiting the Global Banking and Markets segment) and boost equity prices (aiding the Asset and Wealth Management segment). On the back of these tailwinds, consensus EPS estimates for GS stock imply double-digit growth for both 2025 and 2026.
As there is usually a months-long lead time for rate cuts to impact economic numbers, the results of these rate cuts won’t be seen immediately, but later on. That’s good news for Goldman Sachs, which already delivered some notable positive takeaways from its Q3 Earnings Call.
Asset Management and Investment Banking Segments
On the asset management side of the business, management expects its position as a top-five alternatives player to keep yielding results. To this point, Goldman Sachs raised over $50 billion in the first nine months of 2024 in alternative investment capital. The company anticipates that it will raise over $60 billion throughout the full year. As monetary policy expectations become more clear in the coming months and election uncertainty dissipates, capital raised should remain strong heading into 2025.
The company’s investment banking segment was ranked #1 worldwide in announced and completed merger & acquisition deals and common stock offerings during the first three quarters of 2024. Solomon pointed to pent-up demand from clients and a growing backlog as reasons for optimism in the future. M&A volume has even been light versus historical levels, coming in 13% under the 10-year average year-to-date. This is an improvement compared to the 25%-under-par level during the first nine months of last year. That’s why I’m onside with management’s belief that investment banking has a runway to keep growing for the foreseeable future.
Financial Health Remains Strong
Goldman Sachs’ common equity tier 1 capital ratio was 14.6% in the third quarter. This was down modestly from 14.9% for the second quarter, but comfortably above the regulatory requirement of 4.5% set forth by the Federal Reserve Board. Accordingly, Goldman Sachs enjoys investment-grade credit ratings from the major rating agencies.
Current Stock Valuation Isn’t Very Compelling
Predictably, a huge rally tends to stretch the valuation of most stocks. From my perspective, I don’t think Goldman Sachs stock is an exception to this rule. The stock is trading at a current-year P/E ratio of 14.6x, based on its recent share price.
The forward P/E ratio estimate of 12.7x still registers above Goldman Sachs’ 10-year average P/E ratio of 11.7x. I believe potential GS stock gains in the coming months could be limited.
Is Goldman Sachs Stock a Buy, According to Analysts?
TipRanks classifies Goldman Sachs stock a Strong Buy based on 12 Buy ratings and four Hold ratings assigned by Wall Street analysts over the last three months. There are no current Sell ratings on GS stock. The average GS stock price target of $552.40 implies about 4% potential upside.
Investment Summary
Goldman Sachs, as a business, appears to be in an solid place. The company’s third-quarter results were great, and the macro landscape is encouraging. My expectations for Goldman’s stock price are in line with the analyst consensus. However, I don’t believe a potential 6-7% total return (including the dividend yield of ~2.25%) over the next 12 months is sufficient to warrant a buy rating.
While GS shareholders may be happy to come away with a 7% total return for 2025, the risk-reward dynamic isn’t appealing enough for me to take a bullish view. I hold a neutral rating on GS stock.
