Fact Pattern

On 17 January 2022, Goldman Sachs reported disappointing fourth quarter results with a 69 per cent drop in profit as it struggled with ‘a slump in dealmaking, a drop in asset and wealth management revenue and booked losses at its consumer business’.

Analysis

Whilst Goldman Sachs has not been the only financial institution laying off employees, the firm stands out in laying off some 3,200 employees or 6.5 per cent of its workforce in attempt to lower costs – a high number even by Wall Street standards. Now we know why.

It is important to note that Goldman Sachs is not your typical bank. As one of the oldest and foremost members of the bulge bracket, the sell-side firm focuses on headline grabbing corporate deal-making and securities trading with a general apathy towards the average retail investor. However, when even Goldman Sachs’s sophisticated and institutional investors are fearful of committing their cash into big deals, the average retail investor may stand to benefit in maintaining vigilance and interpreting signals for the possible economic headwinds to come. After all, investors may appreciate the firm ‘slimming down’ in cutting operating costs for maintaining profits but be less appreciative if the sessions signal compromised growth prospects.

Implications

Investment banks are cyclical businesses and tend to feel economic pain before other sectors. Long-term investors know this and understand that trading revenues and advisory fees ebb and flow. This may explain why Goldman Sachs’s share price continues to trade near all-time highs.

If history is any indication, it is also believed that large American financial institutions are well positioned to perform strongly following an economic downturn. By being heavily involved across multiple economies via derivative investments, these institutions have gained the contentious status of being ‘too big to fail’ since their failure would cause systemic disruption. In fact, every American bulge bracket bank, with the exception of Citigroup, has outperformed the S&P 500 over the past ten years. Accordingly, investors may expect that these institutions will continue to outperform the broader index once the economy gets back on track and begins to exhibit signs of healthy growth.