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Why Shares of Goldman Sachs Fell 22.4% in the First Half of This Year

What happened

Shares of the investment bank Goldman Sachs (NYSE: GS) fell 22.4% in the first six months of 2022, according to data from S&P Global Market Intelligence.

The investment bank struggled as economic uncertainty weighed on its business. However, the performance wasn't much worse than the S&P 500 index, which lost 20.6% -- its worst start in over 50 years.

So what

Investment bankers were flying high last year as demand for mergers and acquisitions and initial public offerings (IPOs) skyrocketed. Last year, Goldman Sachs raked in profits, putting up record revenue of $59 billion.

This year has been a different story. According to data from Refinitiv, global merger and acquisition activity fell 21% globally and 28% in the U.S. IPO activity fell off a cliff, with global IPO volumes falling 46% and proceeds from those deals falling 58% compared with last year, according to EY.

Inflationary pressures and increasing interest rates have weighed on markets, and geopolitical uncertainty has only added fuel to the fire. Companies have been hesitant to go public due to market volatility. Many companies are holding off going public because they don't want to see their valuations slashed -- which has happened to Robinhood Markets, Coinbase Global, and Marqeta -- all losing 70% or more in market cap since making their public debut.

As a result of this hesitancy, Goldman Sachs saw investment banking revenue fall 38% in the first quarter, causing total revenue to drop 27%. Equity underwriting was especially weak, with revenue falling 83% from last year.

Image source: Getty Images.

Now what

Goldman Sachs could see harsh results when it reports second-quarter earnings later this month. One company that gives investors an early indication is Jefferies Financial Group, which last month reported its earnings for its quarter ending May 31. Jefferies CEO Richard Handler called it "an extremely challenging capital markets environment" as the company's revenue fell 30% and net income fell 68% from last year.

Demand for investment banking remains high, with Handler saying its "backlog is consistent with last quarter's strong levels." Goldman Sachs CFO Denis Coleman has made similar comments, saying its "investment banking backlog remains robust."

Goldman Sachs currently trades at a price-to-earnings (P/E) ratio of 5.7, its cheapest valuation since 2011, when investment banks were recovering from the Great Recession. I'd want to see inflationary pressures recede and interest rates stabilize as a sign of improving economic conditions. In that case, companies could be ready to jump back into making deals, and Goldman Sachs would be in a prime position to bounce back.

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Courtney Carlsen has positions in Marqeta, Inc. The Motley Fool has positions in and recommends Coinbase Global, Inc. and Goldman Sachs. The Motley Fool recommends Marqeta, Inc. The Motley Fool has a disclosure policy.


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