Wall Street Lunch: Goldman Sachs Beats Expectations

Summary:

• Goldman Sachs reports strong Q2 earnings, boosts dividend.
• Treasury yields move higher on the longer end of the curve and lower on the shorter end.
• Walmart partners with Mr. Gatti’s Pizza to expand in-store dining options.

Listen below or on the go on Apple Podcasts and Spotify.

Goldman Sachs declares a quarterly dividend of $3 per shares. (0:16) The 30-year yield tops the 2-year for the first time since January. (1:26) Hedge funds keep selling tech. (8:10)

This is an abridged transcript of the podcast.

Our top story so far. Goldman Sachs (GS) topped earnings and revenue expectations for Q2 and also boosted its dividend.

Goldman’s earnings reflected “strong year-on-year growth in both Global Banking & Markets and Asset & Wealth Management,” CEO David Solomon said. Debt and equity underwriting helped fuel the year-over-year strength.

Q2 operating expenses, though lower from the previous quarter and a year ago, also came in higher than the average analyst estimate.

Q2 GAAP EPS of $8.62 topped the $8.40 consensus, jumping from $3.08 in Q2 2023. Total net revenue, meanwhile, rose to $12.7 billion, topping the average analyst estimate of $12.4 billion. That’s down from $14.2 billion in the prior quarter and up from $10.9 billion a year ago.

Q2 net interest income of $2.24 billion flew past the Visible Alpha consensus of $1.66 billion. Provision for credit losses of $282 million, lower than the $476 million Visible Alpha estimate.

Goldman declared a quarterly dividend of $3.00 per share, up from the prior dividend of $2.75.

In today’s trading, stocks are higher, with the broader market up about +0.5%.

Treasury yields are moving higher on the longer end of the curve and lower on the shorter end. The 30-year yield (US30Y) moved above the 2-year yield (US2Y) for the first time since January.

The 2s10s inverted spread narrowed to 23 basis points, its closest level to normalization since January 29.

Société Générale indicated that the 2-year has breached the lower band of its range that was developed during May and June.

“It is now probing (the) March trough of 4.44%/4.40%, which also represents a trend line drawn since last year. Daily MACD is anchored within negative territory denoting the prevalence of downward momentum. In case a brief up move takes shape, the 50-DMA near 4.74%/4.80% is likely to remain an important resistance zone.”

On the economic front, the July Empire State Manufacturing Index came in at -6.60, below the -5.50 consensus and -6.00 prior.

Pantheon macroeconomist Oliver Allen said “the prices paid index rose to 26.5 from 24.5, but it remains in line with levels seen in the late 2010s. That is encouraging, because the surge in shipping rates since the start of the year … has led some to fret about a renewed burst of core goods inflation ahead.”

Seeking Alpha’s Rena Sherbill spoke about possible interest rate cuts with Larry Adam, who is the CIO of the private client group at Raymond James.

“If you look at Walmart (WMT), they had their big deals going on. And that’s all in the run up to July 16th and 17th when you have another Amazon (AMZN) Prime Day, right?

And again, why are they having these events? Because they’re going to give discounts to try and sell more goods. So I think when it comes to goods pricing, the things that you and I buy, I think that inflation is coming down.

So with that, I think the Fed now can have a sole focus on the economy. And I actually think that the economy is slowing quite a bit. Our economist believes that the quarter we just finished, second quarter and third quarter, the quarter that we are in right now, is going to see GDP growth of around 1%, or slightly below. I think that’s going to get the attention of the Fed that this economy is rapidly slowing down.

And then when you combine that with the fact that the unemployment rate has now gone up 0.7%. Think about that. It was 3.4% last April. It’s 4.1% as we sit here right now. I think that’s going to get the Fed’s attention and they’re going to start to think about cutting rates. The way I see it coming out, I think if the Fed could do it, they probably would have liked to have done it coming up in July, but they’re not going to do that. If you look at what the market’s pricing is, it’s like a 6% chance that they’re going to cut, right?

The Fed doesn’t like to surprise, so I don’t think they’re going to do it in July. But I think they’re going to open the door to possible rate cuts coming.

Remember, they have that big meeting in Jackson Hole at the end of August – August 24th to the 26th. I think there’ll be a lot of speeches starting to articulate that they’re going to start to cut rates, and then they’ll actually start to cut rates at the September meeting.

And by making it very transparent that they’re going to do it in September, I think that’ll reduce some of that political aspect that people are going to start to talk about with a rate cut coming so close to the election. But I want to reiterate, I don’t think the Fed is political at all. I think they’re going to do what is in the best interest of this economy.

I don’t think they want to get burned by sending this economy into a recession. So, I think that they are looking at all aspects of this economy to try and avert a recession.

And I think that this is something big at the Fed. They have the opportunity to do something that very few Feds have been able to do, and that is to actually have a soft landing. I mean, how many times in our career have we heard people say, oh, they’re going to have a soft landing?

Well, guess what? It all of a sudden became a hard landing because, you know, they raised too long and they were too slow to cut. I think the Fed has the opportunity because the data right now is suggesting they should cut. Hopefully they’ll be able to do it to actually get this soft landing. And that is our base case of what’s going to transpire here over the next several months.”

Among active stocks today, SolarEdge Technologies (SEDG) says it plans to lay off 400 employees, including 200 in Israel, as it seeks to restore profitability. Its workforce totaled 5,633 employees as of December 31.

In a letter to employees, SolarEdge’s CEO said the company was taking action in response to a downturn in the market at the end of 2023 and the beginning of this year, which has led to lower revenues and excess inventory.

Walmart (WMT) plans to add new Mr. Gatti’s Pizza shops inside Walmart locations across Texas, Louisiana, Oklahoma, and Kentucky.

The partnership with the pizza chain will begin in Q4 with the opening of 12 units in strategic locations. For Mr. Gatti’s, the expansion strategy brings the chain’s total units open or under development to 230 to double its national footprint and add incremental pressure to Domino’s Pizza (DPZ) and Papa John’s International (PZZA).

Some of the other food chains with a presence in Walmart stores include Uncle Sharkii Poke Bar, Wetzel’s Pretzels, Nathan’s Famous (NATH), Wow Bao, Saladworks, The Cheesecake Factory (CAKE), and Quiznos. The expansion of in-store dining offerings followed the end of a 30-year partnership between Walmart and McDonald’s (MCD).

And if Google (GOOG) (GOOGL) does acquire cybersecurity startup Wiz, it could have a huge ripple effect for both the company’s cloud unit and potentially lead to further deals in the space.

Wedbush analyst Dan Ives says: “For Google, this would be a shot across the bow at Microsoft, and Amazon making a major bet on the cyber security space to complement its flagship GCP offering in the cloud. This would give Google an edge on a number of cloud deployments and further monetize the cyber security cloud space with still less than 50% of the workloads not on the cloud globally.”

“After falling behind Microsoft in the cloud arms race, we have seen major traction from Google over the past year under Kurian around cloud success along with its core AI strategy,” Ives said.

In other news of note, Nvidia (NVDA) is facing a probe over alleged anti-competitive practices by the French antitrust regulator.

The company would be charged “if the investigation is fruitful,” Benoit Coeure, president of the agency, told Reuters. The charges follow dawn raids in the graphics card sector, which sources said targeted Nvidia.

In September last year, Nvidia’s local offices were reportedly raided by the French competition agency on suspicion that the chipmaker engaged in anticompetitive practices.

And in the Wall Street Research Corner, hedge funds sold Info Tech (XLK) and Communications Services (XLC) stocks for the fourth straight week, according to the Goldman Sachs Prime Services desk.

Tech-Media-Telco has been net sold in seven of the last eight weeks. Last week’s selling was driven by long and short sales at a ratio of 4-1, Goldman said.

“Within Info Tech, nearly all subsectors (sans IT Services) were net sold on the week, led in notional terms by Software, Tech Hardware, and Electronic Equipment,” they added. “Within Comm Svcs, net selling in Interactive Media & Svcs, Entertainment, and Diversified Telecomm Svcs outweighed net buying in Media.”

“TMT stocks now make up 29.6% of overall US net exposure, which ranks in the 6th percentile vs. the past year and in the 16th percentile vs. the past five years.”

Consumer Discretionary (XLY) was the most net-bought sector on the Prime book “driven almost entirely by long buys.”

“After being net sold in three prior straight weeks, the sector was net bought for the second straight week,” Goldman said.

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