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In a tough fiscal third quarter, marked by volatility in the global financial markets, top-tier investment bank Goldman Sachs Group Inc. (NYSE:GS) still managed to beat analyst earnings estimates, laying the foundation for what to expect from other banks reporting soon (see GS Earnings Call Transcript).

Goldman's earnings per share [EPS] for the three-month period ended August came in at $3.45 versus the consensus of analyst estimates of $2.98 from a Reuters poll. Beating analyst expectations is nothing new for Goldman Sachs, which also trounced estimates in the first two fiscal quarters of this year by about 55 percent and 12 percent, respectively.

Yet, the appearance of strength masks some weakness. Goldman's net revenue in the third quarter stood just 2 percent above its year-earlier level, and 26 percent below the quarter ended May. Omitting the impact of stock-based compensation, EPS climbed just 6 percent from the year earlier and fell 31 percent from the prior quarter. As indicated below, this recent performance is a stark contrast to the acceleration in the company's revenue and EPS growth rates prior to the latest earnings release: The pace in the trailing 12-month [TTM] span is an improvement from its five-year average, and the clip in the most recent quarter (MRQ, ended May) is faster yet. Further, the TTM and MRQ rates easily exceed the averages for the investment services industry.

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Nonetheless, the market reacted favorably to Goldman's better-than-expected earnings, driving the stock more than 3 percent higher. Other investment banks enjoyed the ride. Lehman Brothers Holding Inc. (LEH), which is scheduled to report earnings on Sept. 13, climbed about 3 percent. Meanwhile, Bear Stearns Cos. Inc. (NYSE:BSC), where results are expected on Sept. 14, advanced more than 2 percent. Morgan Stanley (NYSE:MS) is scheduled to report on Sept. 20 and its shares also traded about 2 percent higher on Goldman's earnings.

As indicated below, these banks have also enjoyed solid improvement in business conditions of late, with considerable acceleration in revenue and EPS growth.

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These solid growth rates have enabled Lehman, Bear Stearns, and Morgan to beat analyst estimates in each of the last five quarters.

Given Goldman's better-than-expected results and the fact that Lehman, Bear Stearns, and Morgan have a longer history of beating estimates, it could be argued that the market is optimistic that these three banks will keep the trend going. Risks do exist, though. Volatility in the global financial markets during Goldman's fiscal third quarter marked a significant departure from the relatively robust environment in the first half. In the recent quarter, Goldman reported a 7 percent year-over-year decline in trading revenue and a 32 percent decline quarter over quarter. The trading operations of these other banks may have also come under pressure, which could adversely impact their results and perhaps even break their string of upside surprises.

At the time of publication, Erik Dellith owned shares of GS. He did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by

Source: Goldman Sets the Standard This Investment Banking Season