Goldman Sachs Groups and Morgan Stanley have earned billions in profits utilizing fixed income trade procedures over past year or so, but this engine of profits may be stalling in the 2nd quarter as turbulence comes to bond markets.
Earnings estimates for these two investment banking firms have been slashed by analysts recently, due to misgivings regarding fixed income trades, and also merger advisory revenues and stock trades. The two banking firms are due to give reports of their results at the end of this month.
Earnings figures due for release in late July could reportedly be weak. This is something of a shock for investors who hoped that the two banking firms' earnings level would normalize by late this year or early in the next.
In the past year, Goldman Sachs depended heavily upon a strong fixed income trade cycle to drive their way to record-breaking 2009 profits of $13.4 billion. Morgan Stanley was slower on the rebound from the finance crisis, but still managed to exceed street expectations through the initial quarter owing to robust results from fixed income trades. A steep drop in Goldman Sach's 2nd quarter earnings down to $2.36 a share is predicted by analysts, in contrast to the $4.93 a share it was earning a year past. Analysts are predicting earnings in the range of 50 cents a share for Morgan Stanley, a loss compared with the $1.10 a share it was earning one year past.
Grimly, analysts who boast superior track records are showing even more pessimism. Goldman Sachs earnings could drop as much as eight and half percent below Wall Street estimations in the initial quarter, per Starmin's Smart-Estimate, which gives estimations an average weight according to analyst's past accuracy. Smart-Estimate's figures for Morgan Stanley is a surprising 3.4 percent off estimates.
The trade was treacherous through the second quarter. Euros nose dives relative to dollars and yen. Risk Premiums for U.S. based corporate bonds, or the additional returns investors demand in trade for assuming credit risks, rose in a markedly unexpected manner for high grade and junk debt both. Globally, stocks dropped, causing losses for many banking firms who derive from U.S. equity.