Goldman Sachs

Goldman Sachs reported third-quarter 2026 earnings, generating strong $18.7 billion in net revenue (up 23%) and $17.01 in diluted EPS, both comfortably topping S&P consensus estimates even as a declining deal backlog and sequentially weakening trading results drew attention.

Why it matters: On one hand, we believe Goldman Sachs is a stronger institution today than it was over the past decade and warrants a higher valuation multiple as a result. On the other hand, we believe investors are extrapolating current results too far into the future, resulting in a rich valuation. The investment banking and trading business is cyclical and mean-reverting, and we believe that investors are overestimating the diversifying benefits of businesses like asset and wealth management, and institutional financing, which tend to encounter rough patches of results at the same time. With the banks in our coverage generating record $280 billion in trailing 12-month investment banking and trading revenue (up 34% annually) in the second quarter, and with equity intermediation and financing revenue hitting record levels as a percentage of global market capitalization, we view mean reversion as inevitable, penciling in a correction in 2028.

The bottom line: We maintain our $730 fair value estimate for wide-moat Goldman Sachs after digesting results, leaving shares trading at a 20%-25% premium at Oct. 13 prices. While quarterly sales growth exceeded our expectations on the back of better-than-expected equity intermediation (up 52% annually) and advisory revenue (up 18% annually), results in FICC trading (down 7% annually) and EPS clocked in below our expectations. Looking ahead, we now expect significant sequential deterioration in trading revenues in the fourth quarter of 2026, although annual results—we expect 30% growth in trading and financing—should remain fantastic. This is offset by the time value of money.

Calling a market top is practically impossible, but it was interesting to hear Solomon describe the current operating environment as a "top-quartile" environment for capital markets firms, a modest sequential degradation from the "top-decile" environment in the third quarter. We saw a few signs of this in consolidated results, with the investment banking backlog declining both sequentially and annually, aligning with our view for declining investment banking revenue industrywide in 2027-28 after an outstanding couple of years. This is an interesting data point, married with comments from Broadcom CEO Hock Tan overnight that financing could become the bottleneck for the AI infrastructure buildout, although it's too early to draw sweeping conclusions at this stage.

Consistent with this view, it's not overwhelmingly clear to us that we've hit a market peak yet in the trading and financing business, given still-strong global equity price levels, underlying economic performance, and reports of excess demand for prime brokerage and portfolio financing, notwithstanding hedge fund borrowing swelling to nearly 150% of AUM in the most recent quarter (against a historical average closer to 100%). A long-awaited uptick in sponsor activity could add further legs to the current cycle, which has been driven primarily by strategic corporate mergers and acquisitions activity. And while FICC intermediation performance was disappointing (down 33% sequentially and 7% annually), this could be fairly attributed to the chilling effect that the third-quarter's bond market sell-off had on activity levels. It's important to highlight that the FICC trading business was operating at far closer to normalized levels than we see in equity trading and financing or even investment banking at this stage, so it isn't where we would expect to see a cyclical turn materialize, all else equal.

While we're not certain that we've hit the top of the market yet, it seems that it is quickly approaching, with the US investment banks in our coverage generating a record 22% average ROTCE during the second quarter of 2026, compared to a 15% average over the past decade. Married with record prime brokerage borrowing, record combined investment banking and trading revenues, surging equity trading activity, and equity trading and financing revenue roughly two-thirds above historical averages (as a proportion of global market cap), we view a cyclical turn as inevitable, and expect it to materialize as soon as 2027-28, with the durability of the AI investment cycle representing the critical variable to monitor.

We maintain our $730 fair value estimate, consistent with a 1.8 times price/2027 tangible book multiple.

Our expectations contemplate five-year compound average annual long-term growth in investment banking revenue of 3.1% annually, 4.6% growth in trading and financing (down from 5.0%), 10.8% annual growth in asset and wealth management (up from 9.9%), and 6.1% annual growth in net interest income (from 4.7%), with balance sheet growth helping to offset declining interest rates. Within that, we expect declining investment banking revenue between 2026-30, after a M&A and equity capital markets-led surge in 2026 that resulted in record global banking revenue. On the trading side, we expect a drag from trading intermediation revenue after decent 2026-27 results, given that the segment appears to be operating near peak-cycle earnings levels. In the asset and wealth management segment, we expect some benefit from monetizing maturing alternative-asset funds, which should drive higher incentive fee recognition and revenue from on-balance-sheet equity and debt investments over the next few years, consistent with our broader view of alternative asset managers.

We view the firm's long-term targets for a 30% compensation ratio (compensation over postprovision revenue) and a 60% efficiency ratio (noninterest expenses over postprovision revenue) as achievable over the long run. As we see it, investments in technology have gradually shifted the balance of power slightly toward brands—investment banks—and away from star bankers, allowing for modest margin leverage over the compensation ratio over time, although intense competition for talent has recently slowed this trend. Still, we expect a significant 310-basis-point margin expansion between 2025 and 2035.

We expect the firm to modestly increase its leverage over the decade to come; we estimate 16.7 times leverage by the end of the decade, up from 14.4 times at the end of 2025. This should allow the firm to release some excess capital to shareholders over the next few years but is contingent on a successful wind-down of historical principal investments.

We assign Goldman Sachs a Wide Morningstar Economic Moat Rating. We believe that the firm has built a defensible brand intangible asset around its storied investment banking franchise and that it benefits from durable switching costs in its asset and wealth management operations. Our view is corroborated by average returns on tangible equity of 14.5% over the past five years, comfortably above our estimated 10.3% cost of equity for the firm.

We believe that Goldman Sachs’ global banking and markets segment has a wide moat largely attributable to a self-reinforcing brand intangible asset in investment banking. In investment banking, firms compete on the basis of reputation, experience, distribution, market-making capabilities, fees, research, and after-offering services, which together underpin modest pricing power. While competition is intense, the most complex, lucrative deals require capability, reach, relationships, and a balance sheet that only the biggest global banks can provide.

In our view, the Goldman Sachs brand allows the firm to compete for coveted lead underwriter roles in the most profitable and differentiated segments of investment banking: merger and acquisition advisory and equity underwriting. Involving Goldman Sachs confers legitimacy on an offering, while the firm’s deep institutional relationships and global trading capabilities allow it to profitably underwrite and place even the most complex offerings. As a result, the firm is involved in roughly one-third of global M&A transactions by announced deal value, per Dealogic, and has maintained its place as the global leader in M&A advisory over each of the past 20 years. Most importantly, the return profile is extremely healthy, if volatile, with investment banking generating a 25% average return on equity when disaggregated (over 2008-21), comfortably exceeding the firm’s 10.3% cost of equity.

Institutional trading and market making, by contrast, is a cost-of-capital business in the aftermath of the global financial crisis, generating an average 9.4% return on equity when disaggregated. Still, it serves an important ecosystem-strengthening role, deepening relationships with clients and allowing large investment banks to compete credibly for the most lucrative global underwriting mandates in the more profitable investment banking segment. Any moat here, on a stand-alone basis, would be derived from a scale-driven cost advantage or a network effect (trading liquidity begets liquidity). But the lack of quantitative support, client preference for multi-homing, and presence of a handful of viable global competitors short-circuit those arguments.

We view institutional trading as something of an ecosystem service, inextricably intertwined with the remainder of the Goldman business, which it clearly strengthens. Because of this, our analysis considers investment banking and trading together, as reported. The combined businesses generated an average ROE of 14% over the past decade, with a significantly lower standard deviation of returns than either business generated independently. We project roughly 18% average annual segment ROEs over the decade to come and believe that the combined segment has a wide moat.

We believe that the asset and wealth management segment also has a wide moat, predominantly attributable to switching costs in the ultra-high-net-worth wealth management business.

Wealth management is a very attractive business. For financial advisors, switching costs are significant. Advisors lose around 20% of their client assets (per Cerulli) to unplanned churn when switching firms and often have to learn new practice management, trading, and bookkeeping systems with their new firm. While client relationships are largely sticky due to the relationship with their financial advisor, wealthier clients do exhibit some more concrete switching costs, with Morgan Stanley disclosing 99% retention among clients with more than $1 million in assets. We suspect that this is because high-net-worth and ultra-high-net-worth clients would be far more likely to value high-touch bundled services that come with more explicit switching costs, like estate planning, cash management, and philanthropic advisory. They’re also more likely to value the time savings that wealth management services provide and to value differentiated product access, tax-loss harvesting, and the design and execution of complex trust accounts. With an average account balance of $70 million and a record of strong, consistent growth, Goldman Sachs’ wealth management business is in enviable shape, in our view.

In asset management, we see signs of an intangible asset moat source, underpinned by an attractive product mix, attractive inflows, and relatively stable monetization rates. By our math, 65% of the firm’s long-term assets under management at the end of 2025 sat in the relatively attractive alternative-asset and fixed-income categories, where the firm has seen very healthy 5.7% and 3.3% average annual organic inflows over 2017-25. Even active equity, a secularly pressured category, has enjoyed 2.6% average annual organic inflows over that period, attesting to a strong investment record and likely intangible asset moat source. In asset management, Goldman benefits to some extent from switching costs—both implicitly from accrued capital gains and more explicitly from lockup periods or redemption gates in its alternative asset funds. On a stand-alone basis, Goldman Sachs' asset management would likely have a narrow moat, although its distribution relationship with the wealth management business structurally improves its competitive position.

Investments in technology could drive the firm's compensation ratio to tick below its targeted 30% over time.

Private equity sponsors have roughly trillions of dollars in dry powder on their balance sheets, which could drive an M&A supercycle in a more accommodating investment environment.

Investment banking consolidation could drive the exit of large but subscale peers and significant share gains.

Trading revenue has been elevated for some time and could reset significantly lower in a risk-off or low-volatility environment.

A significant fallout in private credit markets could represent an opportunity cost for Goldman, which is still seeking to increase its private credit book to above $300 billion in assets under supervision.

Future banking regulation could increase risk-weighted assets, capital requirements, or otherwise disadvantage traditional banks at the expense of more lightly regulated foreign competitors or nonbank financial institutions.