When Goldman Sachs Group Inc reports second-quarter earnings on Tuesday, investors will be keen to hear how the largest U.S. investment bank plans to make up for fast-fading fixed-income trading revenue.

The market expects dreary top and bottom line results.

Analysts believe Goldman will report earnings of $2.27 per share, on average, down 36.2 percent from their forecast a month ago, according to Thomson Reuters I/B/E/S. They expect revenue of $8.1 billion, down 16.9 percent from 30 days earlier.

If analysts' estimates are correct, they would represent a 17.5 percent decline in profit per share and an 8 percent decline in revenue from the year-ago period. In the second quarter of 2010, Goldman earned $2.75 cents per share, excluding one-time charges, on revenue of $8.8 billion.

I really just want confirmation that the earnings estimates aren't going to keep dropping, said Jack Kaplan, a portfolio manager for Carret Asset Management, which has $1.4 billion under management and recently bought a small position in Goldman shares.

Estimates were as much as $16 for full-year 2011, but we're down to $14 now two months later, he continued. It looks cheap, but if $14 is really going to be $10, the stock's not going to rally.

The glum outlook stems largely from difficulties at Goldman's large fixed income, currency and commodities trading business, known as FICC.

Weak client activity and a lack of clear market direction have weighed on large Wall Street banks' trading businesses for the past year or so. But unlike rivals JPMorgan Chase & Co or Citigroup , which posted better-than-expected results last week, Goldman does not have a commercial banking operation to fall back on.

Goldman is also facing aggressive competition for the trading and banking business it seized during the financial crisis, when competitors were hobbled by mortgage losses. The FICC trading business contributed 35 percent of Goldman's net revenue last year, down from 48 percent in 2009.

Many analysts expect Goldman to report a quarterly decline in FICC trading of 30 to 40 percent. JPMorgan reported an 18 percent drop and Citi reported a 20 percent drop.

The absence of proprietary trading may be having a particularly strong impact on Goldman's profits.

The company relied more heavily on making bets for its own account than other banks, according to research by JPMorgan analyst Kian Abouhossein. But Goldman shut down the bulk of its prop trading business ahead of a regulatory reform rule that will ban such activity.

We're expecting a very challenging quarter for Goldman Sachs, said Howard Chen, a Credit Suisse analyst who rates the stock outperform.

Chen cut his second-quarter estimate for Goldman by more than half in late June and lowered his target price to $170 from $190. Goldman shares are down 23.1 percent so far this year, compared with a 8.2 percent decline for the S&P 500 Financial Sector Index.

When asked in April how the company planned to deal with its trading business, Goldman's Chief Financial Officer David Viniar said the bank will look at cost cuts. Layoffs are already underway, and Goldman also plans to cut $1 billion in non-compensation costs by mid-2012.

Most analysts expect FICC trading difficulties to last at least through the end of 2011, as the economy remains stuck in neutral and clients try to figure out the impact of financial reform. But on Tuesday's conference call, investors will want to hear less about how Goldman plans to shrink costs and more about how it will grow revenue.

I'd really like to hear more about the future, said Kaplan, who is holding off on buying more Goldman stock until after this quarter's results are out. If the only way they're going to make their number is laying off 3,000 people, I just don't think that's going to work.

(Editing by Knut Engelmann)

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