Key Points
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Goldman Sachs reported strong second-quarter growth, driven by high investment banking activity.
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CEO David Solomon said that AI spend is fueling economic growth, and it’s not over.
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Investors should still tread carefully.
- 10 stocks we like better than Goldman Sachs Group ›
The five biggest U.S. banks reported second-quarter earnings on Tuesday, and their results painted a very bright picture for investors. Economic activity is high across sectors, driven by incredible growth in investment banking. Goldman Sachs (NYSE: GS) was one of the biggest winners.
Goldman Sachs is the biggest investment bank in the country, and its stock is trouncing the market this year, up 31%, tripling the S&P 500‘s comparable gain. But the impact of a strong market and high initial public offering (IPO) activity isn’t limited to Goldman Sachs and the other big banks. In his discussion of the results, CEO David Solomon remarked, “We expect this flywheel of activity to continue.”
That statement is great news for all investors.
The year of record IPOs
Goldman Sachs tried its hand at consumer banking through its Marcus venture, but investment banking has always been its main revenue generator, and this division is a microcosm of general underwriting and mergers-and-acquisitions activity.
Here are some of the second-quarter highlights:
- Revenue increased 39% year over year.
- Global banking and markets increased 53% year over year.
- Earnings per share were up 92% from last year.
- Return on tangible common equity (ROCTE) was 25.5%, up from 13.6% last year and 21.3% in the first quarter.
Solomon noted that there’s heightened activity in artificial intelligence (AI) infrastructure spending, and that the effect is rippling across industries. “This is creating significant opportunities for Goldman Sachs to provide structuring, financing, risk management, and capital markets execution across both public and private markets,” he explained. Goldman Sachs is benefiting from the windfall; it has established itself as the leader in this industry over more than a century of operations and has strong relationships and a solid reputation.
One of its high-profile activities in the second quarter was serving as the lead underwriter for the record-shattering IPO of Space Exploration Technologies, from which it took in $100 million. It was also involved in the SK Hynix U.S.-based share offering, and it helped raise $85 billion for Alphabet in a secondary offering.
In total, equity underwriting increased 130% to $985 billion.
What it means for the everyday investor
Goldman Sachs is enjoying the robust market activity, but as Solomon notes, there’s a ripple effect across industries, driven by AI investment. That implies continued growth in AI and AI-adjacent companies, as well as in most companies keeping up with the trend. It also implies more upside for AI stocks.
The latest inflation data from the Department of Labor was better than expected, with a 3.5% rise in June, and that’s another sign of a strengthening economy.
Investors should still tread carefully; historically, high IPO activity has preceded market crashes. For example, there were 397 IPOs in 2000, right before the market crashed, and it took 20 years to get back to that high. There were a record 1,035 IPOs in 2021 before the S&P 500 lost 19% of its value in 2022.
For now, it looks like the AI flywheel is turning, and it’s likely to continue for some time.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Goldman Sachs Group. The Motley Fool has a disclosure policy.
