Goldman Earnings Preview: Tall Profits Amid Legal Clouds

Goldman Sachs (GS) is in the news these days for all the wrong reasons, stemming from the Securities and Exchange Commission's fraud suit. But the there's no denying that the New York investment bank is renowned for having the strongest trading desk on Wall Street, and it's expected to have a smashing first quarter when it reports earnings tomorrow morning.

After all, almost all of its banking rivals, including JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C), have reported stellar results, mainly on the back of strong fixed-income trading. Now, Goldman is expected to report earnings per share of $4.01 on revenue of $1.16 billion, according to analysts polled by Thomson Reuters.

Goldman's trading desk has always held a unique position on top of Wall Street financial institutions. Over the last few years, the bank has managed to outperform almost everybody with quarter after quarter of robust revenue and profit growth. "We believe that Goldman's ultimate trump cards are its breadth and depth in making fixed-income markets globally," says Chris Kotowski, an analyst with Oppenheimer, in a report.

Pay Cuts

Goldman's earnings will likely be helped by another factor: lower compensation. Due to the intense public focus on the bank's eye-popping pay packets doled out in the last few years, Goldman pared down its pay and recorded a negative compensation expense in the fourth quarter. Chief Financial Officer David Viniar said it "reflects the extraordinary events of 2009."

While it's unlikely to be negative, the compensation portion of its revenue is expected to be lower than it's been in recent years, and will help lift the firm's profits further.

However, the market may not be be impressed even if Goldman reports super-stellar results. That's because of the questions being raised over whether Goldman engaged in any wrongdoing in reaping some of those outsize results.

Follow the Bouncing Stock

Goldman Sachs has already issued two press releases saying that the SEC's suit is "unfounded" and that it plans to vigorously contest the charges. Still, the news sent a chill through Wall Street as people wonder what the suit signals for future derivative deals not only from Goldman but also from other firms.

Already, Kotowski notes that the stock has been on a wild ride this quarter, mainly on political concerns: $178 on Jan. 7, to $148 on Jan. 29, to $178 on March 19, and today it was down to below $159 -- before bouncing back in late-day trading to around $162.50.