Goldman Sachs Group Inc. reported notably lower net earnings for its fiscal second quarter ending May 27.

Diluted earnings per common share were $1.71 compared with $2.31 for the second quarter of 2004 and $2.94 for the first quarter of 2005. Annualized return on average common shareholders’ equity was 13.4% for the second quarter of 2005 and 18.5% for the first half of 2005.

“Market conditions in the second quarter were more challenging,” says chairman and chief executive officer Henry Paulson Jr. “However, the economic outlook continues to be favorable, our client franchise remains broad and deep, and we retain our leadership position in critical businesses.”

Goldman ranked first in completed global mergers and acquisitions for the first half, and second in announced deals. The firm also ranked first in worldwide initial public offerings and second in public common stock offerings.

However, net revenues in investment banking were $815 million, 14% lower than the second quarter of 2004 and 9% lower than the first quarter of 2005. Advisory revenues were $386 million, 25% lower than the second quarter of 2004, reflecting a decrease in completed M&A. Underwriting revenues were $429 million, 3% lower than the second quarter of 2004, reflecting lower net revenues in equity underwriting, primarily due to a decrease in industry-wide equity and equity-related offerings, partially offset by higher net revenues in debt underwriting, it says.

Net revenues in trading and principal investments also dropped to $2.8 billion, 22% lower than the second quarter of 2004 and 36% lower than the first quarter of 2005. Fixed Income, Currency and Commodities revenues were also down 20% to $1.5 billion.

One bright spot was the equities business, which saw revenues increase 3% to $1.1 billion, primarily reflecting higher net revenues in the firm’s principal strategies business, partially offset by lower net revenues in the firm’s customer franchise businesses, particularly in convertibles. During the quarter, the business operated in an environment characterized by generally lower equity prices and continued low market volatility, the firm says.