The growing mismatch between the last two big names on Wall Street is illustrated by analysts' forecasts: Goldman earnings are expected to more than double, while Morgan Stanley is seen just eking out a profit, lagging far behind its year-earlier results.
Analysts say the third quarter was a resilient one for the banks, with strong sales and trading results and gains in asset management.
These are two companies that have two less major competitors than they did last year with the failure of Lehman Brothers and Bear Stearns, said Bill Hackney, chief investment officer with Atlanta Capital Management. We think the outlook for both of these companies is very strong.
Goldman is expected to post earnings of $4.24 per share before one-time items, up from $1.81 a year earlier, according to analysts polled by Thomson Reuters I/B/E/S. Morgan Stanley is expected to report 29 cents a share, down from $1.32, hurt by debt-valuation adjustments.
Goldman, whose embarrassment of riches is setting it up for a possible bonus bonanza at year-end, earned $4.93 per share in the second quarter, while Morgan Stanley lost $1.10 per share.
Goldman plans to report third-quarter results on October 15; Morgan Stanley has not yet set a date.
If Morgan Stanley did manage to turn a profit in the third quarter, it was with a sigh of relief. The bank has suffered three straight quarterly losses and has been slow to join Wall Street's rebound party after the near-collapse of the financial services industry a year ago.
Analysts remain concerned about the bank's continued losses on real estate principal investments and the accounting ramifications of improvements in its debt prices.
In recent years banks recorded big gains on the declining market value of debt they issued, because they could buy back the debt cheaply. But as banks' prospects have improved in the last few quarters, the value of their debt has jumped, forcing them to reverse earlier gains, weighing on earnings.
Morgan Stanley will take some pain in terms of writing up their own debt yet again, said Steve Stelmach, an analyst with FBR Capital Markets.
Goldman, though, looks to be well past the troubles that continue to plague its rivals.
Goldman is in a very sweet spot and they should do very well, said Marshall Front, chairman of Front Barnett Associates.
The bank's position is so strong that analysts expect it to stash away an additional $5 billion to $6 billion -- about half of third-quarter revenue -- for bonuses, lifting the year-end bonus pool to more than $16 billion.
Goldman, which has repaid $10 billion it received under the U.S. Treasury bailout program, has been criticized by lawmakers and consumer advocates for setting aside so much for bonuses so soon after the assist from taxpayers.
Goldman has to walk this fine line between paying their people too much and sending the wrong signal to government and taxpayers, said Michael Hecht, an analyst with JMP Securities, who expects Goldman to set aside far less for compensation in the fourth quarter.
Hecht recently boosted his third-quarter earnings forecast for Goldman to $4.35 per share. He reduced his view on Morgan Stanley to 30 cents a share, saying he expects results to remain noisy at best and lackluster at worst.
Like Goldman, Morgan Stanley also has repaid $10 billion borrowed from taxpayers.
Morgan Stanley is preparing for CEO John Mack to step down at year-end. Co-President James Gorman will become CEO and Mack will become chairman.
(Reporting by Steve Eder; editing by John Wallace)