Goldman Sachs may operate cautiously as the fiscal cliff hangs over fourth quarter earnings, notes Michael Wong, an equity analyst with Morningstar.
"With the potential for a 'fiscal cliff,' Goldman Sachs and other banks will stay to the high ground in terms of liquidity and their capital structure," says Wong, in an interview earlier in October. Caution may not be great news for investors given that new regulations and declining leverage at Goldman are depressing some of the firm's key stock drivers.
Meanwhile, although a rising tide of analyst forecasts bodes well for Goldman's earnings, bank stock investors generally haven't been good at identifying risks to earnings a quarter or two out. After Goldman's shares touched levels above $120 for a sustained period following the bank's strong fourth quarter 2011 results in January, investors bid up shares only to see them fall sharply amid fears of the impact of ratings downgrades by Moody's.
On Monday, Goldman's chief equity strategist David Kostin put out a decidedly bearish stance on stocks headed into year-end, as the cliff wrecks what's been a strong year for equities. Kostin sees the S&P 500 falling over 10% through year-end, as Congress walks slowly toward the fiscal cliff, derailing C-Suite and consumer confidence."We assign a low probability that Congress addresses the 'fiscal cliff' in a benign fashion prior to year-end 2012," Kostin wrote, in a note that gave one-in-three odds the U.S. will go over the cliff in January. Such a scenario would have a notably similar impact to the drain a budget ceiling standoff caused last summer. All spring and early summer market participants assumed Congress would raise the borrowing limit before the ceiling was reached," writes Kostin, who notes a 17% plunge in the S&P as talks came down to the final hour. "
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