Goldman Sachs Stock Leaps Ahead After Passing Fed Stress Test With Flying Colors

Goldman Sachs (GS) stock closed the first half of the year with a 23% gain, outperforming its peers and the broader market.

The stock also finished higher than its peers on Monday, the first day of trading since the Federal Reserve's stress test, which measured the banks' balance sheets against a worst-case scenario including 10% unemployment and a 33% drop in home prices, found that all 22 participating banks had sufficient strength to remain healthy.

“Large banks remain well capitalized and resilient to a range of severe outcomes,” said Michelle Bowman, the Fed’s vice chair for supervision.

Analysts said that Goldman, Wells Fargo, Citigroup, and M&T Bank have emerged as winners in the Fed's stress test, as their Stress Capital Buffer (SCB) will decrease. The SCB is an additional layer of capital that large banks must hold, in addition to minimum regulatory requirements, to mitigate any future economic downturns.

"Very strong result for Goldman Sachs in terms of both the result and some additional validation of the evolution of the business model under this management team," analysts at Citigroup said after calling the bank a big winner following the test.

Goldman’s SCB is estimated to go down 290 basis points to 3.3%, the most significant decrease among U.S. banks in this year’s stress test, as per Morgan Stanley analysts. The brokerage believes that the bank’s pre-election hedges played a key role in the decrease.

Some Wall Street analysts believe the banks will use the freed-up capital for share buybacks or dividends.

JPMorgan & Chase stock is up nearly 22% this year, while Citi and Wells Fargo stocks have gained 21% and 14%, respectively.

Retail sentiment on Stocktwits about Goldman Sachs, Citi, and JP Morgan was in the ‘bullish’ territory as of Monday.

The U.S. central bank is currently working on a proposal to average out the stress-test results over two consecutive years, to reduce volatility in the data and simplify the test for banks, which have long criticized the complexity of the examination.

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