Goldman Sachs: A Forecast Is Not a Trade
Goldman Sachs is an investment bank: it advises on transactions, underwrites issues, trades, and manages assets. Its published forecasts circulate widely as news, but they are house views produced for institutional clients and carry no risk rule a trader could act on.
How it works
It is an investment bank, and everything follows from that. The recognisability is unusual; the business is not, and the general page on the model explains most of what this firm does.
Four lines of business. Advising on transactions and underwriting issues. Trading and market-making. Managing assets for institutions and wealthy individuals. And, more recently, consumer-facing products — the newest and smallest part.
The revenue is cyclical in a specific way. Cheap borrowing produces mergers and flotations, and volatility produces trading revenue. Neither tracks the stock market directly, which is why the shares behave differently from a broad financial index.
Nothing in the core business is aimed at a retail trader. Recognizing that removes most of the confusion about what its published output is for.
What the forecasts actually are
A house view is published on a schedule and revised as conditions change. It circulates as a headline because the name carries weight, and by the time it reaches a general audience the institutional clients have had it for some time.
Forecasting is hard for everybody, including the people who are good at everything else. The base rate for macro and price forecasts is unimpressive across the industry, and a strong brand does not change the underlying difficulty of predicting.
A view that has been on the newswires is priced. Whatever information content it had was expressed in the market before it reached you, which is the general problem with acting on published research.
In practice
The firm is paid for arranging, not for being right. That is the structure of the business rather than a criticism, and it explains why the research and the advisory sides need separating internally.
Market-making means quoting both sides and managing inventory. There is no adversarial intent in that, and there is also no duty to your outcome.
The cycle runs in years, not quarters. Deal droughts and deal booms both persist, so a single quarter’s results say little about the trajectory.
By the time a rating change is reported, the opening gap has happened. The information reached clients first, and the price reflects it before the article exists.
A target has no invalidation attached. It tells you a destination and never tells you where the idea is wrong, which makes it unusable for a stop and therefore unusable for sizing.
Acting on a headline costs the same as acting on anything else. The spread and any commission are paid in full going in and coming out, and a rating change that is already priced may not be worth even that.
Using bank research the way it can be used
The forecast is the least valuable part and the modeling is the most. A research note contains industry structure, capacity data, contract terms and cost assumptions gathered by people who spend their working lives on one sector.
Read the assumptions and ignore the conclusion. You can disagree with an assumed growth rate and see what happens to the answer; you can do nothing at all with a rating. A note that states its assumptions clearly is worth reading even where you think it is wrong, and one that hides them is worth nothing whatever it says.
And treat the target as a piece of market information rather than a piece of analysis. Knowing what a widely followed firm has published tells you something about what other participants have read, which is occasionally useful and is not the same as knowing what a company is worth.
What Goldman Sachs is not
It is not a retail broker. The clients are institutions.
Its research is not advice to you. It is a house view.
A target is not a plan. There is no invalidation.
And its forecasts are not better than the base rate. Forecasting is hard.
How this connects
Its research feeds the same inputs any valuation uses. An analyst’s price target usually rests on a DCF or a multiple, and the intrinsic value behind it is only as good as the earnings guidance the company supplied.
The macro desk’s influence runs through rates. Its calls on the yield curve and a coming Fed decision are read by bond market participants, and the firm is active in the instruments that express those views, from treasury futures to the interest rate swap.
Scheduled events matter to its revenue as much as to anyone’s positions. An economic calendar full of surprises raises client trading, and the bank’s own earnings report is closely read for what it says about deal activity.
Its asset management side competes with BlackRock and Vanguard, though with more active strategies and private investments such as commercial real estate rather than low-cost index products.
Wealth management puts it in front of individuals. A wealth manager there is paid for advice and products, and whether a fiduciary duty applies depends on the account and the service.
In electronic markets it faces specialist competition. High frequency trading firms dominate much retail equity flow, bought through payment for order flow, and large institutional orders often route to a dark pool instead.
And Warren Buffett’s investment in the firm during the financial crisis is a reminder that its own shares are a cyclical financial holding, valued like any other.
When it fails
In a quiet market both engines slow at once. Deals stop happening and trading volumes fall, so the revenue is exposed to conditions in a way a fee-on-assets business is not.
The second failure, for a reader, is treating a published view as an edge. It was priced before publication.
A third is trading a target with no invalidation. There is nowhere to be wrong, so there is no size.
A fourth is inferring the firm’s positioning from its research. The desks are separated deliberately.
A fifth is assuming the brand improves the forecast. It improves how widely the forecast is read, not how often it is right.
And a sixth is reacting to the headline version. The gap on the chart already happened.
The original data
Of the 24,971 videos in this site’s search study, 2 have “goldman sachs” in the title, and one of them has 5,610,812 views. Investment banks appear in 2 titles at a median of 793,650 and hedge funds in 22 at 83,975. Repeat appearances of the same video count once.
The question: The bank just raised its target. Follow it?
Two videos, and one of them was watched five and a half million times. That single upload is among the most-viewed things in this entire corpus, and its framing is worth noticing — it is an ex-employee talking, not an explanation of what the firm does. The name sells the video; the business does not.
A note on that figure: the raw corpus file listed this video twice, which is why the deduplicated count is two videos rather than three. It is the reason every count on this site is now taken from unique video identifiers rather than rows.
The answer to that final question is no, and specifically because you cannot size it. A target with no invalidation gives you nothing to put a stop against, and a position without a stop has no defensible size. Read the assumptions behind the target and form your own view of them — that content is genuinely valuable, and the number on the front page is not.
Related
Investment bank is the business model this firm is an instance of. Market makers covers the trading half and why the quote is an inventory decision. And hedge fund is the client on the other side of much of this activity.
I read a headline forecast and immediately look for the thing it leaves out, which is what would have to happen for it to be wrong. A target without an invalidation is not something you can trade, however good the firm producing it.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.