Goldman Sachs profit tumbles 24% despite bond-trading surge

Microsoft – Better Buy: Apple vs. Microsoft | Fintech Zoom – World Finance

Goldman Sachs profit tumbles 24% despite bond-trading surge

Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:(MSFT)) have fought each other for market share since the late 1970s. At various times, one has appeared to dominate the other.

But in recent years, some investors have begun to believe that Apple will fall behind as its iPhone becomes commoditized and Microsoft emerges as a top player in the cloud.

However, two emerging trends may give stockholders a case for sticking with Apple.

Despite their rivalry, both companies have enjoyed great success. Apple has amassed the world’s largest market cap of around $2 trillion, while Microsoft has the second-largest market cap at $1.8 trillion.

Moreover, both have built cash hoards that all companies should envy. Apple holds $195.6 billion in cash on hand, offset by $112 billion in various forms of debt. Over the trailing 12 months, it generated $80.2 billion in free cash flow. 

Image source: Getty Images.

In comparison, Microsoft holds about $132 billion in cash, against $60.5 billion in total debt. Free cash flow for the company came in at about $50.4 billion over the previous 12 months.

 Nonetheless, almost no company, including Apple, matches Microsoft‘s AAA credit rating. Despite its debt levels, Microsoft has built a track record of financial stability going back to the 1980s.

It could also pay off its debt immediately with existing cash, lowering its credit risk.

How Apple stands out

Apple pioneered an entire industry through the iPhone, its largest revenue driver for more than a decade. In time, competition from lower-cost players using Alphabet‘s Android operating system forced Apple to offer lower-cost iPhones as the company’s overall net sales fell.

However, this situation may have changed. The pandemic brought about increased iPhone sales as dependence on such devices rose. Now, Apple has launched the 5G iphone-12. With the 5G iPhone’s faster speeds, Apple regained some pricing power. This has brought back some of the higher margins that bolstered iPhone profits in past years.

Moreover, Apple has maximized wearables sales, in part by promoting the health benefits of the Apple Watch. It not only monitors one’s heart but also measures blood oxygen levels and sends out an alert in case of a fall.

Additionally, Fitness+, Apple‘s fitness experience that works with the Apple Watch, launched on Dec. 14. Apple partially credited the Apple Watch with taking wearable sales 30% higher year over year in the latest quarter.

Also, Apple‘s services division, which includes iTunes and the App Store, has achieved notable successes with a 24% 12-month surge in revenue over the same period. Some analysts speculate that services could generate half of Apple‘s profits by the middle of the decade.

As a result, Apple earned more than $294.1 billion in revenue over the last 12 months. This represents a 10% increase from the previous 12-month period. Also, thanks in part to the iPhone release last fall, overall revenue for the latest quarter increased 21% from year-ago levels.

This revenue improvement led to net income for the latest quarter of almost $28.8 billion, 29.3% higher than year-ago levels. An increase in operating expenses of only 12% helped contribute to the higher profit surge.

This growth took Apple stock higher by more than 70% over the last 12 months. Additionally, its P/E ratio has risen to 33. This stands out, as Apple‘s multiple struggled to move above 20 before 2020.

Still, its 29% net income increase does not match the growth in its P/E ratio during the same time frame. Thus, investors will have to also consider whether Apple now justifies its more expensive valuation.

AAPL data by YCharts

The case for Microsoft

Microsoft has also struggled for respect at times. When Satya Nadella became CEO in 2014, he inherited a company reeling from the decline of the PC and the slowing growth of Windows.

As the previous head of Microsoft‘s cloud and enterprise group, he transitioned Microsoft to a cloud focus. This led to the company becoming the second-largest cloud provider with 15% cloud market share, according to ParkMyCloud. This lags only Amazon, which pioneered the industry.

Other software bolsters Microsoft as well. Microsoft 365, which constitutes its Office, intelligent cloud, and security suite, primarily drives its productivity and business processes division.

This division makes up roughly one-third of the company’s revenue, approximately the same as one year ago. Still, revenue increased 11% from year-ago levels.

Within that division, the Office 365 commercial suite surged 21% during that period, while its Dynamics 365 software, its ERP tool, registered a 38% increase for that period. 

Furthermore, the company released its latest generation Xbox gaming console late last year. Moreover, Xbox Live, its multimedia social gaming service, has grown to 100 million monthly active users, while GamePass now claims about 18 million subscribers. Overall, Xbox content and services revenue increased 30% over the last 12 months.

Still, Xbox appears to have fallen short of its peers. Sony experienced 42% growth in its game & network services division, though Sony did not break out PlayStation revenue separately. Nintendo reported 38% growth in its Switch platform. Un its peers, Nintendo has not launched a next-generation console since 2017.

Despite slightly lower gaming growth, Microsoft stock has moved higher by just under 50% over the last year. Also, its P/E ratio has reached 36.

This far exceeds the P/E ratio of 15, where Microsoft traded at the time Nadella took over in 2014.

Still, the multiple has fallen from a multi-year peak above 60 in 2018, when a one-time tax charge temporarily reduced income and boosted the valuation. 

Apple or Microsoft?

Between the two tech stocks, I believe Apple still holds the edge. The 5G upgrade cycle will force all smartphone users to eventually upgrade, supporting iPhone sales and higher margins for years to come.

Additionally, the growth in wearables and services could add to that revenue growth.

Moreover, even with Apple‘s rising valuation, it still trades at a slightly lower multiple than Microsoft, despite higher cash flows and profit margins.

While this success will not negate Microsoft‘s bull case, it gives Apple more potential for higher returns.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Fintech Zoom premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


What Recession? Trading Revenues Surge At Goldman Sachs, Morgan Stanley, JPMorgan Thanks To A Massive Market Rally

Goldman Sachs profit tumbles 24% despite bond-trading surge

Updated Jul 16, 2020, 03:04pm EDT

While many of the nation’s largest banks saw their profits plunge during the second quarter, trading revenues have surged, enabling banks to maintain strong capital positions and better position themselves to weather the coronavirus pandemic.

Banks with a focus on trading are seeing better results than those with traditional lending … [+] offerings.

Andrew Burton/Getty Images

Investors have piled into the stock market amid unprecedented volatility this year resulting in a major boost to trading revenues at the nation’s major banks.

And while the focus during this earnings season has been on bank losses this quarter, the market isn’t appreciating how much banks are benefiting from a good sales and trading environment, says Ian Lapey, portfolio manager of the Gabelli Global Financial Services Fund.

Surging trading revenues are helping banks—especially those with large investment banking divisions—book big reserves to weather the coronavirus recession.

“That will allow them to protect future earnings along with capital markets issuance—and that business has been booming,” says Lapey.

The biggest difference between the coronavirus recession and the 2008 financial crisis is that “financial institutions today are fairly stable and robust,” says Omar Aguilar, chief investment officer of passive equity and multi-asset strategies at Charles Schwab.

“In fact, most financial institutions are part of the solution as opposed to being part of the problem in 2008,” when capital markets closed down and investment banks faced significant losses, Aguilar points out.

Today’s markets, by comparison, have remained “very liquid” thanks to massive support from the Federal Reserve, which means high yield and debt issuance that is good for banks, says Lapey. Banks are “much better positioned than last time around,” he agrees.

But not all banks are seeing the full benefits of the trade surge: Bank of America and Wells Fargo are setting aside larger loan reserves, and as a result, they’re posting earnings that are less impressive than banks with strong capital markets activity, JPMorgan or Goldman.

“So, clearly, you’re seeing the banks who have a higher proportion of investment banking and trading divisions as opposed to traditional lending are doing much better,” says Lapey.

The bank handily beat analyst estimates for the second quarter thanks to stronger-than-expected trading revenues. Fixed-income traders posted a nearly 170% revenue increase, while equity traders saw revenue jump 23%. Morgan Stanley’s investment banking revenue climbed 39%, boosted by a boom in debt and equity issuance.

Bank of America

While Bank of America also saw a surge in trading revenues that helped offset damage from the coronavirus pandemic, the results were less impressive than those of rivals JPMorgan and Goldman Sachs. While bond trading revenue was up 50%, equity trading revenues were up only 7%. But the lender also had to set aside $4 billion of reserves for credit losses causing its stock to fall.

Goldman Sachs

Goldman posted a blowout second quarter on the back of its best trading results in years.

The bank’s heavy focus on trading and investment banking, which made up around 75% of its revenue during the quarter, paid off amid stock market volatility caused by the pandemic.

Trading revenue surged by 93% overall, bond trading revenue alone by 150%, and equity trading revenue by 46%. The bank’s investment banking division saw revenue climb 36%. 


With its strong capital markets activity, JPMorgan “really showed itself to be more resilient in this environment than more traditional banks Wells Fargo,” says Bill McMahon, chief investment officer of active equity strategies for Charles Schwab. The bank topped expectations thanks to a 79% percent jump in trading revenue. Bond trading was especially profitable, with revenue increasing 120% from a year earlier.

Wells Fargo

As a commercial bank and traditional lender less focused on trading and investment banking, Wells Fargo faced steeper losses. The bank reported a $2.

4 billion loss—its first quarterly loss since the 2008 financial crisis—and slashed its dividend to 10 cents per share.

“Wells Fargo is more of a restructuring story with new management,” says Lapey, adding that beyond recently changing CEOs, the firm had “all sorts of issues” even before the pandemic.


Citi also topped earnings estimates thanks to strong trading results. The bank reported that its fixed-income trading revenue rose nearly 70% year over year, accounting for most of its Markets and Securities Services revenues, which rose almost 50% overall.

While Citi “did terribly during the last crisis,” Lapey says, “now they’ve spent eight years preparing for a recession.

” The bank has been able to continue its dividend, benefited from strong leadership and positioned its balance sheet “much more conservatively,” he says.

Full coverage and live updates on the Coronavirus


Goldman Sachs warns US stocks could plunge another 16% before rapidly recovering

Goldman Sachs profit tumbles 24% despite bond-trading surge

New York (CNN Business)Mayhem has descended upon global financial markets. The Dow has suddenly crumbled to a three-year lows. Crude oil is in an epic tailspin. And central banks are racing to put out fires.

The damage on Wall Street might not nearly be done as authorities scramble to stop the spread of the coronavirus by shutting down parts of the once-booming American economy.

Goldman Sachs is warning clients that the S&P 500 could bottom at 2,000 by midyear, marking a 41% plunge from the record highs set just a month ago. The Wall Street bank expects stocks to rapidly recover before the end of the year.

“The coronavirus has created unprecedented financial and societal disruption,” Goldman Sachs strategists wrote in a note to clients Sunday.

A bottom of 2,000 in the S&P 500 would mark a 26% drop from Friday's close. And it would translate to a roughly 16% decline from Monday's close at 2,386 after another ferocious day of selling that once again forced trading to be halted.

The Dow is now on track for its worst month since October 1987, the month of the infamous “Black Monday” crash.

“The recent price action in the S&P 500 has been eerily similar to late September/early October 2008,” Lori Calvasina, head of US equity strategy at RBC Capital Markets, wrote in a note to clients Monday.

US stocks plunged by 57% during 2008 crisis

Investors are increasingly pricing in the risk that the United States tumbles into a recession because of the coronavirus pandemic.

“This could be a fast bear market that of 1987. However, this time, a short recession is ly,” Ed Yardeni, president of investment advisory Yardeni Research, wrote in a Monday note to clients.

During the 11 recessions since World War II, the S&P 500 suffered an average peak-to-trough decline of 30%, Goldman Sachs said. However, US stocks fell significantly more during the last two downturns as corporate earnings cratered.

The S&P 500 lost 49% of its value after the tech bubble burst in 2000. And the index was down by as much as 57% during the 2008 financial crisis. Such a steep losses this time would cause the S&P 500 to sink to 1,700.

It's incredibly hard to precisely time a bottom in stocks. Retail investors shouldn't bother trying to do so because even the professionals admit they're not sure.

“Precision is difficult in a volatile market with daily price swings of +/-5% and a VIX level of 75,” Goldman Sachs strategists noted.

Has capitulation been reached? Maybe not

Market confidence has clearly eroded, though perhaps not by as much as is needed to suggest a bottom has been reached.

RBC said that institutional investor sentiment, measured by asset manager positioning in US equity futures, has dropped significantly but remains well above the lows of December 2018, March 2009 and other recent market troughs. Even if this measure tumbled by another 30%, it would still be above those market bottoms, RBC said.

wise, bullishness among retail investors may not be done fading.

The gap between bulls and bears in the American Association of Individual Investors (AAII) survey has tumbled to –21.6%, RBC said. But it dropped to –26.5% in August 2019, -28% in December 2018 and –51.4% during the financial crisis.

“Sentiment has deteriorated further on both but not enough to suggest that either camp has capitulated,” Calvasina wrote. “The sentiment data was telling us that it was still premature to call a bottom in the S&P 500 or an end to the stock market's recent b extreme volatility.”

Earnings could fall sharply

Corporate America's bottom line is going to get hit very hard by the coronavirus pandemic.

Goldman Sachs has downgraded its per-share earnings forecast for the S&P 500 twice in two weeks and now expects “extreme weakness” that peaks with a 15% drop in the second quarter. However, Goldman expects a speedy rebound in earnings that will propel stock prices later in 2020.

“The lesson of prior event-driven bear markets is that financial devastation ultimately allows a new bull market to be born,” Goldman Sachs strategists wrote.

For instance, the S&P 500 plunged by 19% after the 1998 Russian sovereign debt default. But stocks than ripped 28% higher over the next six months.

A similar rebound happened in 2011 after US stocks tumbled 19% during the European debt crisis. That gave way to a 29% recovery in six months.

3,200 by the end of the year?

A rebound later in 2020 could be aided by extreme steps taken by global central banks to restore confidence and keep markets functioning.

The Federal Reserve has embarked on two emergency rate cuts this month, including one late Sunday that sent rates back to zero. The Fed has also promised to pump in trillions of dollars of cash into financial markets and relaunched its 2008 crisis-era bond buying program known as quantitative easing.

“There is nothing the Fed can do about the viral pandemic. But these moves should help to calm the pandemic of fear in the financial markets,” Yardeni wrote.

Goldman Sachs is predicting the S&P 500 will rocket back to 3,200 by the end of 2020. That would amount to a 60% spike from the forecasted low of 2,000. Fasten your seatbelts.

“,”author”:”Matt Egan, CNN Business”,”date_published”:”2020-03-16T19:24:46.000Z”,”lead_image_url”:””,”dek”:null,”next_page_url”:null,”url”:””,”domain”:””,”excerpt”:”Mayhem has descended upon global financial markets. The Dow has suddenly crumbled to a three-year lows. Crude oil is in an epic tailspin. And central banks are racing to put out fires.”,”word_count”:873,”direction”:”ltr”,”total_pages”:1,”rendered_pages”:1}


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