There’s no denying Goldman Sachs’ (GS) 2Q earnings were fantastic. The firmed earned $3.4 billion, or $4.93 a share, largely exceeding analysts’ expectations and even blowing Meredith Whitney’s bullish estimates out of the water.
But Goldman’s resurgence should send “shivers down the backs of every hardworking American,” former labor secretary Robert Reich writes on his blog.
“Goldman’s high-risk business model hasn’t changed one bit from what it was before the implosion of Wall Street,” he says, noting GS is still making giant bets with tons of borrowed money. “While its rivals have pared back risks, Goldman has increased them. And its renewed success at this old game will only encourage other big banks to go back into it.”
Nevertheless, the stock’s movement – down 0.2% today at $149.21 after rising 5% yesterday – suggests investors are showcasing “reasonably rational exuberance,” Barron’s Bob O’Brien says. Or maybe it’s just a bit of buy-the-rumor-sell-the-news action.
The good news is the risk aversion that characterized Wall Street over the last month seems to have reversed, at least temporarily, based on yesterday’s trading session, he notes. But “it’s just not going to turn into some mushroom cloud of euphoria, not with the onset of an earnings campaign that’s expected to generate declines of 35% year over year.”
Whether other banks reporting later this week can offer similar blowout quarters is certainly debatable. But, plain and simple, what’s clear is the market wants to rally, says Gluskin-Sheff chief economist David Rosenberg, while attributing yesterday’s gains mainly to Whitney’s bullish Goldman comments.
Even after 12 years of no appreciation in equities, and after brutal bear markets seven years apart, the public’s resolve in the stock market has not been shaken. The fact that the equity market could rally this much based on one analyst’s commentary is testament to the view of how badly investors want to believe that the recession and credit crunch are behind us and that unbridled prosperity lies ahead.
Rosenberg adds a small, but crucial caveat. ”History would suggest that credit earthquakes are followed by aftershocks, so our advice is to invest accordingly.”