The first earnings season of 2025 is kicking off, and as always, the financial sector leads investors into the first round of action this week. While banking stocks aren’t that exciting to most, the biggest investment banks usually give many clues as to where the economy currently is or might be headed. Since they are attached directly to the business cycle, investors should start paying attention today.
There are two types of banks, however. There are commercial banks that deal in more conventional products like mortgages and personal solutions, and then there are investment banks that deal with corporate finance and the broader business cycle.
The former group is a great gauge of the consumer cycle, while the latter is better for investors trying to figure out where the financial markets are headed.
Knowing this, an in-depth analysis of the Goldman Sachs Group Inc (NYSE:GS) and its latest quarterly earnings report might be of great value to start the year off, as investors can then align their portfolios in the right direction.
Through a price action view, as well as breaking down which segments of the bank outperformed, the picture will become clear as day.
Goldman Sachs Stock’s Price Action Leads to Better Markets
The main difference between a bank like Goldman Sachs and Bank of America Corp (NYSE:BAC) is that their price actions track different markets.
When Goldman Sachs outperforms Bank of America, it means that underlying business trends are probably on the stronger end of the spectrum, while the opposite would signal a stronger defensive environment.
Investors can see this theme in action as Bank of America outperformed Goldman Sachs during 2020 through 2022. During the peak months of COVID-19, the defensive consumer finance space was seen as less risky, and as the lower interest rate environment and a safer consumer space kicked in, Goldman Sachs took over.
The most recent year saw a 57% performance in Goldman Sachs stock, while Bank of America only saw a 47.3% rally. The implications of this pricing spread could signal to investors that a new business cycle might be underway, and there are specific ways to tell by how the bank’s businesses performed.
Traders Shine, Dealmaking Bottoms
There are two main businesses in an investment bank like Goldman Sachs: the trading business and the dealmaking business (investment banking). Both deal in either equity (stock) or debt (bonds), and the activity levels between the two are where all the insight lies for investors.
When investment bank clients look to deal more with equity trading or underwriting, it probably means that stock prices are too high. The same is true for bond underwriting activity and bond prices in general. Today, most of the activity and growth came from equities, pushing a quarterly growth rate of 32%.
On the other hand, while equities outperformed bonds during the past 12 months, there is some sort of rotation going on now in the market. Debt underwriting grew by 35% over the past quarter to outperform equities. What this means is that markets are starting to find more favorable setups in bonds than in stocks.
This makes sense since, using this insight, Goldman Sachs analysts decided to warn Main Street about potential tail risks in the S&P 500, recommending investors look to buy bonds and commodities instead within their 2025 global macro report. This might be the reason why Buffett has reached a record 25% cash position today.
It would also explain why the energy sector is suddenly back in favor, with many names in the Energy Select Sector SPDR Fund (NYSE:XLE) grabbing more and more attention. Goldman Sachs also quoted that the backlog of investment banking (dealmaking) fees increased compared to last quarter.
This backlog means that the bank expects higher bond prices and lower yields, which could result in a dealmaking activity surge in 2025 as the financing environment becomes more flexible. More than that, there is one last check investors can take home on Goldman Sachs’ balance sheet.
Inside the quarterly results presentation, investors will notice that the net charge-off rate declined by 0.1% over the year. While this may not sound like much on a percentage basis, it means that the state of credit markets and loan quality is improving, making these bond investments a lot more attractive fundamentally.
This is why investors should monitor the iShares 20+ Year Treasury Bond (NASDAQ:TLT), as a rotation into bonds seems inevitable at this point.