It’s been a year for the history books so far. Inflation is at its highest level in 40 years. Around the world, interest rates are rising at their fastest pace in 30 years. To top it off, the S&P500 the index is off to its worst start in 50 years.
In response, many companies are waiting to go public to avoid market volatility, and initial public offerings (IPOs) have dropped dramatically. Investment banks like Goldman Sachs (GS -0.80%) have seen demand for their services dry up. Here’s how Goldman’s business has been affected.
IPOs have gone from one extreme to another
When markets sold off in March 2020, when the pandemic first emerged, central banks and federal governments teamed up to provide unprecedented economic stimulus. This created a favorable environment across all asset classes that lasted through the end of 2021.
Meanwhile, companies quickly went public and IPOs boomed. According set of factsmore than 1,000 companies went public last year, raising $317 billion.
This year, investors worried about inflation and rising interest rates. Add to that geopolitical uncertainty and you have a recipe for volatile markets. Companies are hesitant to go public and prefer to wait until market conditions support higher valuations and investor confidence is high. This year has not seen that. As a result, only 92 companies have gone public so far, while raising $9 billion, per FactSet.
Here’s how Goldman Sachs’ earnings are affected
Goldman Sachs provides investment banking services to its clients, helping companies complete merger and acquisition (M&A) deals, raise debt and go public through IPOs. Goldman is one of the world’s top investment banks and consistently ranks among the top companies in mergers and acquisitions and equity-related deals.
The company was a big winner last year, and its $59 billion in revenue represented a 62% growth over two years. Its investment banking services also more than doubled during this period.
In the six months of this year, Goldman’s total revenue fell by 25% and its net income by 45%. Its investment banking revenue is down 38%, with the underwriting business hardest hit. Stock subscription, through which it helps companies go public through IPOs, was down 86% from a year ago. Meanwhile, debt underwriting, the way it helps companies raise money through debt, fell 34%.
What to expect
Investment banking is a highly cyclical business, vulnerable to economic conditions, and this is one of the main reasons these companies trade at a lower multiple. Goldman Sachs is currently trading at a price-to-earnings (P/E) ratio of 7.2, its cheapest valuation in years. Investment banks are likely to experience near-term headwinds as long as market volatility persists and companies continue to wait for the right time to go public.
Once the skies clear, Goldman Sachs could be in a strong position. According to Chief Financial Officer Denis Coleman, the investment bank’s order book is down from its peak last year, but is still higher than at any time in 2021 – a good sign that the business could rebound significantly once conditions improve.
Courtney Carlsen has no position in the stocks mentioned. The Motley Fool holds positions and recommends FactSet Research Systems and Goldman Sachs. The Motley Fool has a disclosure policy.