The Goldman Sachs Group, Inc. (GS) reports fourth-quarter 2020 earnings next week, with analysts expecting a profit of $7.36 per share on $10.1 billion in revenue. If met, earnings per share (EPS) will mark a 57% profit increase compared to the same quarter in 2019. The stock entered a two-week slide in October despite beating third-quarter top- and bottom-line estimates, but Goldman shares recovered in November and lifted nearly 40% into year-end. Expectations are running high as a result of that impressive performance, especially with the financial sector in full-blown accumulation mode.

Key Takeaways

  • Goldman Sachs reports fourth-quarter 2020 earnings in the pre-market on Tuesday, Jan. 19.
  • The stock is technically overbought and trading at an all-time high.
  • The company is benefiting from higher yields and the widening yield curve.
  • A sell-the-news reaction after earnings could presage a larger-scale correction.

The financial powerhouse lost its superstar status after the 2008 economic collapse, with Dodd-Frank reforms putting a lid on proprietary trading activity. Weak corporate investment and the transition into stock buybacks as the primary method of share appreciation also hurt Goldman's bottom line. The 2020 stimulus and high odds for a 2021 package under the Biden administration has set bond yields on fire, promising higher profits in the financial sector in coming quarters.

Goldman is entering the robo-advisory space in 2021 despite intense competition, now testing an automated investment service called Marcus Invest. An annual management fee, starting at 0.15% of assets, will allow retail clients to access a subset of features offered to the broker's richest clientele, with smart-beta ETFs and asset allocation models for an investment of as little as $1,000. As with rivals, accounts will be monitored "daily" and rebalanced "periodically."

Wall Street consensus on Goldman Sachs is mixed, with a "Moderate Buy" rating based upon eight "Buy" and two "Hold" recommendations. One analyst is unimpressed with growing tailwinds, telling shareholders to close positions and move to the sidelines. Price targets currently range from a low of $225 to a Street-high $407, while the stock is set to open Friday's session on top of the median $313 target. Targets and ratings should go higher if the company beats expectations once again next week.

Tip

A stock buyback, also known as a share repurchase, occurs when a company buys back its shares from the marketplace with its accumulated cash. A stock buyback is a way for a company to re-invest in itself. The repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. Because there are fewer shares on the market, the relative ownership stake of each investor increases.

Goldman Monthly Chart (2007–2021)

Chart showing the share price performance of The Goldman Sachs Group, Inc. (GS)

TradingView.com

A multi-year uptrend topped out at $250.70 in 2007, giving way to a pullback that accelerated to an all-time low at $47.41 during the 2008 economic collapse. It bounced back to $188 in the third quarter of 2009, marking resistance that wasn’t mounted until a 2015 breakout that failed a few months later. A more sustained bid after the 2016 election lifted the stock 23 points above the 2007 peak in March 2018, ahead of another failure at year-end.

The stock fell to a seven-year low during the 2020 pandemic decline and turned higher into June, stalling just above $200. It cleared that barrier in November and took off like a rocket, posting an all-time high on Jan. 6. The on-balance volume (OBV) accumulation-distribution indicator shows healthy buying interest but is situated well below highs posted more than a decade ago. However, the divergence isn't useful because the company has bought back thousands of shares over the same period.

The latest monthly candlestick is trading 100% outside the top Bollinger Band®, setting off an automatic sell signal that predicts a pullback or extended consolidation. In addition, the monthly stochastic oscillator has lifted into an extremely overbought level that has triggered three bearish crossovers since 2009. Taken together, investors should tighten risk parameters if there's a sell-the-news reaction after earnings because it could expand into a full-blown intermediate correction.

Tip

A Bollinger Band® is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security's price, but which can be adjusted to user preferences. Bollinger Bands® were developed and copyrighted by famous technical trader John Bollinger, designed to discover opportunities that give investors a higher probability of properly identifying when an asset is oversold or overbought.

The Bottom Line

Goldman Sachs stock is overbought and trading at an all-time high ahead of the Jan. 19 earnings release.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.