Goldman Sachs ‘ dealmaking prowess may grab all the glory, but the biggest driver of growth last quarter came from the daily-grind of equities trading. Sure, Goldman and the other top Wall Street banks were able to cash in on all the market volatility lately. Many are even on track for their best year ever when it comes to trading revenue. But Goldman, in particular, has put itself in a position to meet the moment through years of investment and a strategy shift within its Global Banking & Markets group, which includes investment banking, equities, fixed income, currency, and commodities (FICC). The firm has made a concerted effort to get big clients that come in through the door for investment banking or wealth management to use its equities services and vice versa. Just look at how the bank crushed last quarter’s earnings report. Revenue from Goldman’s equities business handily topped estimates, surging 72% to a record $7.42 billion in the second quarter. Investment banking revenue rose 55% to a much-better-than-expected $3.4 billion, which included fees from SpaceX ‘s IPO and $25 billion bond sale during the quarter. It also includes the money earned from co-leading Alphabet ‘s massive $85 billion equity raise, which was announced in June. FICC revenue also beat, rising 32% to $4.6 billion. Global Banking & Markets is Goldman’s largest division, garnering $15.5 billion in revenue last quarter, or over 75% of the bank’s total revenue. The other two reporting segments — Asset & Wealth Management and Platform Solutions — brought in $4.6 billion and $221 million in revenue, respectively. Speaking to Goldman’s Kevin Kelly, the global co-head of client coverage for Global Banking & Markets and global co-head of equities, I asked him what’s driving stocks, where markets are going next, and what makes the business tick. The interview, which took place on July 22, has been edited for clarity and length. Let’s start at the highest level and explain what, exactly, Goldman’s equities business is. It may be a little harder to understand than even, say, what an investment banker does. How would you explain it to somebody at a cocktail party who doesn’t know a lot about Wall Street? Kelly: We’ll just start with the investment banker that most people know about and then what we do. So obviously, investment banking’s end clients are the corporates. That’s the Apples of the world, the Broadcoms , etc.. That’s their real main clients. You have people in investment banking who do both mergers and acquisitions, capital markets activities; then you have just sector coverage bankers. So you choose your industry, people cover that sector and the companies within that sector, and they help them with all kinds of corporate transactions on the private side. When you come to the public side, and I’ll speak about equities, we help institutional and wealth clients transact. So, think about cash sales, trading equities for our clients. We give them content, ideas, different structures, helping them intermediate that risk both on the equity, cash, stock format. That’s as well as derivatives, right? Options, puts, calls, and other structures. We have a derivatives business that services that kind of broad client base of clients trading up, sales and trading, and so that’s your kind of second core business. And when you think about that, that’s under intermediation if you think about our quarterly reports and our earnings calls. Then we have an equity financing business that really includes several businesses. That’s a classic prime brokerage business. So think about financing for hedge funds, asset managers, pensions. We provide financing and also shorting capabilities. That’s our futures business. So think about clients trading futures globally, and then we have a clearing business, which is really focused on broker-dealer clearing. Really same financing, but for different client segments. The last business we have in there is our registered investment advisor custody business (RAA), known as Goldman Sachs Custody Solutions. That again is providing custodial and financing services for RAA. The equity financing business is kind of doing the same thing at its core, just for different client segments. We’re seeing so much uncertainty with the Iran war and seemingly stubborn inflation. What’s client activity telling you about the state of the market? Kelly: If you look at the first few months of the year, the equity market generally has behaved as there’s AI winners and AI losers, and there was nothing in between. I think you saw that with software. It was indiscriminate that the world was short software, or that it was going to go down, and AI was going to cannibalize that business. And the winners were the winners. I think what you’ve seen over the last six to eight weeks, similar to what we’ve seen across our derivatives business, is dispersion, meaning outcomes are very different for a company in software. It’s not like a correlation of one in software. It’s a lower correlation. There could be a winner and there could be a loser. So, I think when clients step back, they’re saying “the year has been quite good.” I think over the last six weeks we’ve seen people manage their risks because returns have been quite good this year and take down some of their exposures in this AI thematic. We’ve seen them diversify a little into other spaces but still overweight this theme. I think the view of the capex cycle will continue. The big question is really, “Okay, at what valuation?” We know the earnings power is there, but what multiple are you going to put on those outside of 2027 and into 2028, 2029, 2030? That’s a debate in the market. That’s one. Two, I’d say there’s a concern around crowdedness in this theme. How I define crowdedness is just the number of people that are in the same trade. It’s less the size of the position. Obviously, there’s the institutional audience who’s long these names. But there’s also levered ETFs. There’s retail, which can be 20% of the volume on any given day. That is an investor type, hence why we cover it as well. The concern of the market is they believe in earnings power, they believe in the three- to five-year story, but the question is, “is it just crowded right now?” I think that’s some of what we’ve seen of taking chips off the table over the past six weeks. To put some numbers around that, when we started this year, 10% of our net portfolio, so long exposure minus short exposure was semi and semi-cap equipment. It went to a high, both semi, semi-cap equipment of 24% net of the book. Almost a quarter of the portfolio was in that theme. It’s now come off to about 18%. It’s still elevated, but down a little bit. I think part of that is people seeing the performance of their stocks and being super judicious and taking exposures down . And I think the next thing is the question around tokenmaxxing and how do we think about optimization as enterprises adopt this? How do people do that most efficiently? I don’t think there’s any argument around the power of AI and the effects it will have across the enterprise. We saw Goldman report a pretty amazing quarter earlier this month. We saw equities revenue beat expectations and jump 72%. Other than a favorable backdrop of market volatility, can you talk a bit more about any other tailwinds that drove that growth? Kelly: You have a few other things going on. 1.) The equities market’s growth is incredibly strong right across the U.S. Earnings revisions, earnings growth is incredibly strong. 2.) You look at the consumer. That remains quite resilient, right? So, corporate activity is busy, whether it be M & A, ECM, IPOs, etc. Lastly, it’s the AI capex cycle. When we think about all those things, there hasn’t been many periods of time like it in terms of the magnitude of what this capex is adding to GDP. But also more interestingly, look how broad it is. A lot of times when people think about the macro, they think about it from a perspective of, ‘Oh, it’s the semis and memory companies,’ but it’s actually spanning a lot of industries. So, when I think about what this leads to, there’s obviously been large IPOs, but this capex cycle really flows into everything we do. I’ll give you an example by each business. Let’s start with derivatives. Single-name volatility is at all-time highs. Index volatility is one measure versus single-name volatility. That’s the widest spread, meaning index volatility is low and single names are high. It’s even greater than Liberation Day and around that period. (Editor’s note: President Donald Trump announced wide-ranging tariffs on April 2 2024, known as “Liberation Day,” and resulted in huge market swings in the weeks that followed.) So, what does that mean? That means that clients are hedging exposures a lot more because things are more volatile and more uncertain. I think AI creates this pace of change in evolution, where people are moving around portfolios quickly. And then lastly there’s the market appreciation. Clients are coming in and saying, “I want to hedge myself. I want to be more active. I want to move risk.” And I think that then comes to the cash equity sales and trading of where clients are moving positions around. Given this volatility, they might be hitting price targets faster than it once was. We’ve just seen that the needs of our clients rely more on us, given the market cap, the appreciation, as well as the volatility in the market. Lastly, the tailwind. It’s really been a multi-year investment in our Asia franchise. For the equities business, it was a place where our competitors were outperforming. We had to make investments 1.) in our people, 2.) in our technology, cross execution financing. When I think about the growth in that market, obviously it’s a home of AI infrastructure. Many companies in Korea, Taiwan and Japan are driving that AI capex. But the retail participation in Asia has increased significantly as well. You’ve seen that with the growth of levered ETFs and things like that. That has led the market to be more active with us as well. It’s a combination of both our investment as well as the market opportunity. I know it’s hard to comment on the outlook of the equities business, just given the nature of it. But could you identify some potential headwinds moving forward, and specifically what the firm has in place to offset any downturn in client activity? Kelly: This is an interesting time. You don’t generally have, when volatility is this high, client activity being this high. Most of our clients target vol in their portfolios. There’s a certain number they want to stick to, but generally when volatility picks up, you see downturns in the market. You haven’t seen that. You’ve actually seen volatility go up and the market go up. So when I think about all of our businesses, there are a few ways you do that. One is client diversification. But even within hedge funds, long/short act very differently than systemic clients and multi-managers like Citadel and Millennium. If you think about all of our businesses, each business is trying to build the ballast of business because we understand that there are peaks and troughs to client types and different products. And in terms of the outlook, we believe strongly in the AI capex cycle. We’ve seen the growth of it, and we see where it’s headed. But there will be ups and downs like the volatility we’ve seen in the last four to six weeks. I wish I could predict the market. We can’t. But I think what we can do is build a ballast of businesses with diversified clients and diversified products to meet their needs. That gives us the best opportunity to continue to have a resilient business on the whole. The recent quarter also made it clear that Goldman has one of the top equities franchises on Wall Street. 1.) What is the bank’s edge over peers like Morgan Stanley or JPMorgan? And, 2.) How does Goldman plan to grab more share…
