Goldman Sachs chairman and CEO David Solomon thinks it would be wise for investors to pay extra attention to the path of corporate earnings in the weeks ahead.
"I do see a little bit more market volatility — but I think the volatility at this point, the market is expecting," Solomon said on Yahoo Finance Live at the firm's 10,000 Small Businesses Summit (video above). "I think you've got to watch corporate earnings. And up to this point, corporate earnings have hung in reasonably well. But with a tightening economic environment, I think you're going to see more pressure on corporate earnings."
Solomon added that the situation is "just math. If we kept the same earnings multiple on the S&P 500, and corporate earnings decreased by 10%, you can figure out what the market impact is. So I think the big thing to watch in the next 12 months is corporate earnings. If you're a student of history, any time we've been in this kind of environment, a decline in corporate earnings lags. And that may put a little bit more pressure on stock markets."
The market appears to be taking less-than-rosy second-quarter earnings reports and cautious earnings calls in stride.
Share prices for those companies that have reported second-quarter earnings so far have risen 1.3% on average after posting results, according to data from Evercore ISI strategist Julian Emanuel. Companies beating on both the top and bottom lines (known as "double beats") are higher by 1.3% on average versus the 0.9% five-year average.
Emanuel noted that the positive reaction from traders comes despite average S&P 500 company earnings trending 12% lower so far.
As for Goldman Sachs, the bank delivered a better-than-feared quarter this week amid strength in fixed income and equities trading. Goldman reported earnings of $7.73 per share on Monday, beating analyst forecasts of $6.58 a share.
Second-quarter sales and profits did fall by 23% and 48%, respectively, as the company was swept into the industry-wide softness in investment banking activities. And investment banking sales dropped 42% from a year ago as companies delayed deal-making during a pickup in stock market volatility brought on by aggressive Federal Reserve rate increase plans.
Goldman shares are up nearly 9% on the week — a stronger positive reaction than the average mentioned above — outperforming the S&P 500's gain of around 3%.
"So while the market backdrop is stressed, Goldman Sachs trading should benefit," Glenn Schorr, an analyst at EvercoreISI, wrote in a note to clients. "Book continues to grow (up double-digit percentage year over year), the strategic remixing continues and Goldman Sachs continues to draw some attention as the stock’s hanging around book value."
Schorr reiterated an outperform rating on Goldman stock.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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