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Goldman Sachs's (GS) fourth-quarter earnings report Wednesday showed the company isn't immune from the market slowdown and generally weak demand for investment banking and other Wall Street activities.

In previous quarters the Wall Street titan has handily exceeded expectations. But this time it only narrowly beat earnings estimates, as Goldman Sachs posted weaker-than-expected revenue from fixed income and equity trading and from investment banking.

Revenue fell 10% year over year to $8.64 billion, while profit fell 52% to $2.39 billion, or $3.79 a share. For the full year, revenue declined 13% to $39 billion, and profit fell 38% to $8.3 billion.

Analysts had expected fourth-quarter revenue of $9 billion and profit of $3.76 a share.

Results in Goldman's two biggest businesses, investment banking and trading, fell across the board. Investment banking revenue fell 10% in the fourth quarter compared to the same period of 2009, and trading and securities services revenue was down 31%. Goldman also said its investment banking backlog decreased from the third quarter.

Trading in fixed income, currencies and commodities, long one of Goldman's most lucrative operations, fell 48% from the fourth quarter 2009.

Goldman attributed the weakness to lower client trading activity, which was starkly highlighted in the firm's adjusted financial reporting that separates market making from proprietary trading and investing activities. Market making, the business in which Goldman trades on behalf of clients, fell 43% in the fourth quarter compared to 2009, while revenue from principal transactions rose 50% over the same time.

Analysts on a conference call expressed concern whether the weakness was a permanent shift or merely a blip. David Viniar, Goldman's chief financial officer, noted that the firm has given back some of the market-share gains it took in fixed income trading in 2009 as Goldman's competitors suffered during the financial crisis.

Those competitors are now stronger and their rebound, combined with lower client demand, ate into Goldman's trading activity in the latest period. "Clearly in the month of December, things were just dead," Viniar said. "Across the full year, I would say the competitive landscape got much tougher."

For things to improve, Goldman's customers will have to be more active in the markets, Viniar said. Trends for the first two weeks of this year indicate activity has picked up from the December lull.

Despite the weakness, Goldman will continue to expand globally, Viniar said. Goldman executives told Dow Jones last month they planned to increase the ranks of investment advisors by one-third, and Goldman executives have talked about the growing importance of emerging markets.

Viniar said the firm will add staff, mostly in growth markets abroad, and particularly in investment management. The additions could mean Goldman's headcount will increase by a percentage up to the high single digits, Viniar said. Goldman added 10% to its staff from the fourth quarter of 2009.

Investment management was a bright spot in the quarter, as revenue rose 14% from the fourth quarter of 2009.

Expenses not related to compensation rose 11%. Goldman wrote off $305 million from the value of its NYSE Euronext (NYX) floor-trading operations, nearly wiping out its investment in the business a decade after acquiring Speer Leeds & Kellogg. It also set aside a net $19 million for litigation and regulatory proceedings.

Goldman has lately faced persistent scrutiny, most recently over its controversial private placement for Facebook. On Monday, just weeks after tantalizing private clients with the chance to get in on a $1.5 billion private investment in one of the hottest technology companies in years, Goldman told U.S. clients it wouldn't allow them in on the offering, which raised potential regulatory and legal issues.

Goldman Sachs set aside less in annual compensation to reward its 35,700 employees. The firm's compensation expense was $15.4 billion, down from $16.2 billion, a year ago. On a per employee basis, compensation was $430,700, down 13.6% from $498,246, a year earlier.

Shares dropped 3.1% to $169.25. They are up 1.4% in the past year.

(Matt Jarzemsky and Brett Philbin contributed to this report)

-By Liz Moyer, Dow Jones Newswires; 212-416-2512; liz.moyer@dowjones.com

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