Will Goldman Miss or Exceed Modest Bar Set for Tomorrow?

Goldman Sachs (NYSE: GS) is expected to release earnings tomorrow as the trading session opens at 9:30 AM. It has already had a sharp decline of as much as 3.3 percent since Thursday, the last close when JP Morgan (NYSE: JPM) started off the earnings season with disappointment. Since then, Citigroup has helped maintain a sour mood on the financials, with sub-consensus results.

As financial stocks exhibit this crowd behavior of rising and falling in tandem or on each other's actions, what are we to expect when the “vampire squid” opens its own ledgers tomorrow? More specifically, has the market priced in a potential miss already? Does the stock stand ready to pounce on lesser-than-expected disappointment? Or does GS have more to fall?

Consensus on the street is that Goldman Sachs should post adjusted earnings of $1.57, down from $3.79 the same quarter a year ago. That is nonetheless better, should it materialize tomorrow, than the loss of $0.84 per share the last time it reported quarterly earnings, which was only its second loss in its history as a publicly traded company. Low as current consensus is year over year, it has been continually adjusted down over the last90 days, by as much ashalf, across a wide array of analysts.

One to know these shoes well, Citigroup trimmed its EPS expectations on Goldman's fourth quarter even lower last week, as it thought a weak fourth quarter should come as no surprise. “We trim our 4Q est from $2.45 to $1.10 (vs $1.68 cons) primarily due to a more conservative view on 2011 comp flexibility coupled with reduced expectations for Goldman's Investing & Lending business,” said Citigroup as it maintained its Buy rating and $125 target price on Goldman Sachs.

Goldman got a slightly less kid-gloved treatment from Evercore Partners last month, when it got initiated with an Equal-weight rating and a $100 target price as it believed growth and return of the past was unlikely to return for a while. On the fourth quarter to be unveiled tomorrow, they said, “The environment remains abysmal in 4Q11, although mark to market pressure will abate. We are forecasting 4Q11 EPS of $1.38, well below consensus ($2.30).”

Gradual firing shot from cohorts may fulfil a role to adjust expectations accordingly so as to avoid a knee-jerk reaction when earnings hit the wires. Whether the share pullback that started last Friday was a pricing-in of tomorrow's news ahead of time, or a persistent knee-jerk reaction that is indicative of bigger reactions to follow tomorrow, we will find out... tomorrow.