What's going on?

Shares of Goldman Sachs dropped more than 2% on Tuesday, despite the firm making more profit than expected! (tweet this)

What does this mean?

The problem was Goldman�s trading division, particularly the part that trades bonds, currencies and commodities, which continued to struggle after already reporting a weak first quarter earlier this year. Prices didn�t move around very much during the quarter (i.e. volatility was low), which gave clients less reason to trade. Since Goldman makes money largely by matching buyers and sellers, fewer trades lead to less revenue. Overall, Goldman�s trading revenue fell 17% versus a year ago � a drop that was worse than its peers (which is unusual for Goldman).


However, in recent years, Goldman has placed more emphasis on investing in private companies and lending to businesses. Revenue in this newer division rose more than 40%, helping Goldman make more profit than Wall Street was expecting. But investing in private businesses tends to produce inconsistent returns, so investors don�t expect such a good performance every quarter.

Why should I care?

For markets: Investors are asking if Goldman�s traditional strength in trading is now less relevant.

Wall Street trading has simply become a much less lucrative business since the financial crisis � and that may not change anytime soon. All the regulatory changes have put pressure on banks� profits (e.g. Goldman must now keep far more money in low-risk investments, in order to protect against another 2008-style crash). Technology may be driving down trading costs, but perhaps margins as well. Whatever the cause, the business of trading is a tough one right now � the question is whether it will recover.

The bigger picture: The bar for banks� performance is higher than it was a year ago.

In the immediate aftermath of President Trump�s election, bank stocks jumped significantly (20-30% across the board) � and they have stayed at roughly the same level since. With stock prices so much higher than they were, it�s tougher to impress investors � and bank stocks are more susceptible to selling off.