Trump Policy Tailwinds Don't Favor Goldman Sachs

Nomura has downgraded Goldman Sachs Group Inc GS to Neutral, as it believes Donald Trump tailwinds appear largely priced in to the shares following the recent rally.

Financials Under A Trump White House

Financial stocks are rallying post-election, with the Financial Select Sector SPDR Fund XLF up 11 percent versus 3 percent gain for the S&P 500. Specifically, Goldman shares have gained 16 percent.

The financial sector is set to benefit from Trump’s proposed policy changes of reducing corporate tax rate to 15 percent from 35 percent, with potential for higher rates, accelerated capital return and loan growth.

“Following the recent rally, we see risk/reward as more balanced for GS, given an already low tax rate / heavier international gearing; lower asset sensitivity; higher risk of multiple rebasing (akin to 2004–06 rate cycle); and weaker excess capital/buyback capacity,” analyst Steven Chubak wrote in a note.

What That Means For Goldman Sachs

The potential lower corporate taxes will particularly benefit firms that are more U.S.-centric. As such, Goldman is less attractive on this front due to its heavy international presence.

Chubak pointed out that Goldman is unlikely to repeat its outperformance in the last tightening cycle in 2004–2006 due to a tougher post-crisis regulatory backdrop.

Also, Goldman screens on the lower end in the analyst’s buyback scenario that assumes 100 percent of excess capital will be deployed toward repurchases. In this scenario, earnings uplift at Goldman Sachs is projected at just 1 percent.

“While GS screens as a negative outlier on this basis, this is more a reflection of our modeled payouts for the firm already crediting significantly higher payouts/return of excess capital compared with peers, thus the incremental benefit is also less,” Chubak highlighted.

Other Names In The Space

Meanwhile, Chubak prefers Bank of America Corp BAC, as his analysis of Trump policy tailwinds supports more than 20 percent upside potential despite the stock’s recent strong rally.

Further, the analyst sees 7–10 percent EPS uplift from Trumponomics at Charles Schwab Corp SCHW, E*TRADE Financial Corp ETFC, Raymond James Financial, Inc. RJF and Stifel Financial Corp SF.

In a related development, analysts at Keefe, Bruyette & Woods upgraded Goldman Sachs to Outperform from Market Perform.

At last check, shares of Goldman Sachs rose 1.10 percent to $212.00.