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August was a bumpy month for the financial markets, particularly at the beginning and the end of the month, and that rough patch battered Goldman Sachs' (GS) trading business. After the close last night, Reuters reported that CEO David Solomon stated during the Barclays Global Financial Services Conference that trading revenue is tracking towards a 10% decline in Q3 due to the more challenging conditions last month.

For other firms that rely heavily on their trading operations, like Morgan Stanley (MS), JPMorgan Chase (JPM), and Citigroup (C), the warning from GS represents a red flag of sorts, although a recovering investment banking industry should help to offset this trading downturn.

• GS and its competitors are coming off a strong Q2 for trading, especially on the FICC (fixed income, currencies, and commodities) side. Last quarter, FICC net revenues increased by 17% for GS, driven by strength in interest rate and mortgage products. However, the market for these FICC products soured in August. At the same time, GS is lapping a strong yr/yr comparable in Equities this quarter as net revenue in Equities grew by 8% in 3Q23.
• For some context, combined FICC and Equities trading net revenue in Q2 represented approximately 50% of GS's total net revenue. In comparison, Fixed Income and Equity trading net revenue accounted for about 33% of MS's total net revenue last quarter as the company's more diversified business model helps to insulate it from the swings in the trading business.
• GS has taken the opposite approach as MS, scaling back on its consumer business, while sharpening its focus on its core investment banking, asset management, and trading businesses. About one year ago, the company sold off home improvement lender GreenSky to a consortium of institutional investors led by Sixth Street. During the presentation last night, Mr. Solomon disclosed that GS plans to pare back further on the consumer business by exiting a credit card partnership with General Motors (GM), creating another top-line headwind.
• The good news, though, is that the prospects for lower interest rates continues to fuel a comeback for the investment banking industry. In Q2, investment banking fees jumped by 21% to $1.73 bln, reflecting substantially higher revenue in both debt and equity underwriting, mainly from convertible offerings and IPOs. The improved landscape for dealmaking should be a significant positive factor when GS reports Q3 earnings on October 15.

GS is taking a pretty good hit today, indicating that the downturn in Q3 trading revenue is worse than the market anticipated. Similar to the past few quarters, Q3 is shaping up to be a mixed performance for GS, with the investment banking business leading the way.