Goldman Sachs' Strong Fundamentals Mask Overvaluation and Cyclical Risks

What happened

Goldman Sachs enters Q4 2025 earnings with a bullish narrative from a recent article, citing robust Q3 results including 20% net revenue growth and record assets under supervision. The company's strategic shift away from consumer credit to focus on core banking and wealth management aims to enhance earnings stability and reduce volatility. However, the DeepValue master report critically notes the stock's 67% surge has driven it to trade at premium multiples of 17.5x EPS and 2.35x book, pricing in sustained mid-teens ROE. This valuation depends heavily on near-peak investment-banking conditions, which are exposed to cyclical downturns in M&A volumes and regulatory pressures. Despite operational improvements, the current price offers thin margin of safety, with risks including consumer exit costs and potential ROE compression below 12%.

Implication

Goldman's premium valuation assumes continued strong investment-banking fees and stable ROE, but these are highly cyclical and vulnerable to macroeconomic shifts. Any reversion in M&A volumes toward 2023 levels could quickly erode earnings, driving the stock toward lower bear-case valuations around $700. The consumer credit exit, while reducing long-term volatility, involves transition costs and residual risks that may not be fully accounted for in current optimism. Regulatory changes, such as tighter capital requirements, could further constrain profitability and limit capital returns, adding downside pressure. Therefore, investors are better served waiting for a more attractive entry point, ideally near $750, to build margin of safety against these uncertainties.

Thesis delta

The new article highlights Goldman's operational strength and strategic progress, but it does not alter the core cautious thesis from the DeepValue report. The delta lies in reinforcing that market optimism may be overlooking the cyclical and regulatory vulnerabilities, maintaining the potential sell rating due to overvaluation. Investors should recognize that short-term strength is already capitalized, with the thesis shifting slightly to emphasize heightened risk if M&A activity normalizes sooner than expected.