We recently compiled a list of the 9 Best Financial Services Stocks To Buy Now. In this article, we are going to take a look at where S&P Global Inc. (NYSE:SPGI) stands against the other financial services stocks.
Although there was significant turbulence in the financial markets in August, the state of global financing is still stable. Despite considerable falls in the equities and corporate debt markets, financing conditions have not tightened significantly, suggesting borrowing resilience.
However, following an almost 10% drop, the broad US stock market is still 5% below its peak in July. Similar declines have been seen in European stocks, although there has been some recovery in these markets; the 500 large companies market is up 3% from its August low.
The markets for corporate bonds have also been impacted. Higher-rated corporate bonds saw an increase in risk premiums, but not to the point where it materially affected borrowing conditions. The current market volatility, according to Chris Jeffrey of Legal & General Investment Management, hasn’t affected corporate or household finance conditions significantly. This perspective is supported by the financial conditions index of a major global financial institution, which indicates that while circumstances have tightened since mid-July, they are still historically loose and more accommodating than they were for a large portion of the prior year.
Amidst the financial turbulence, the financial services industry has faced challenges, but it also showed resilience. The long-term outlook for the industry remains positive. As we have mentioned in our article, “25 Biggest Financial Firms in the World,” the financial services industry is expected to rise at a CAGR of 7.7% over the next few years, from $31138.82 billion in 2023 to $33539.52 billion in 2024. In 2023, Western Europe accounted for the largest portion of the financial services market, with North America coming in second. Financial services are transforming as a result of generative AI, which presents chances for creativity and efficiency.
The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the correct operational model in place. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 to 4.7 percent of industry revenues, primarily through increased productivity. A new study by MGI examined the usage of Gen AI by 16 of the largest financial institutions in the US and Europe, which together manage assets worth close to $26 trillion. According to the study, more than half of the organizations examined have embraced a more centrally driven structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. Moreover, artificial intelligence, according to EY, is changing financial markets by improving risk management and enhancing customer experience due to its wide range of uses.
The RSM US’s Financial Services Industry Outlook 2024, also notes that the financial services market is quickly evolving, with a focus on responsible AI in insurance. Similar actions are being taken by states as well. For instance, insurance companies are required by the California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violation carries hefty fines. Secondly, the number of retail-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges, and broker-dealers. Finally, the real exposure of financial institutions to CRE maturities is another trend in the financial services industry. Hence, financial institutions analyzing CRE-related risk should conduct a thorough credit risk evaluation.
Methodology:
We sifted through holdings of financial services ETFs and financial media to form an initial list of 20 financial services stocks. Then we selected the 9 stocks that had the highest upside potential. The stocks are ranked in ascending order of the upside potential.
Some big shots in the financial services industry have been left out owing to our methodology since they had negative consensus upside.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A group of analysts studying data on a large monitor.
S&P Global Inc. (NYSE:SPGI)
Analysts’ Upside Potential: 9.17%
One of the biggest credit rating companies in the world, S&P Global Inc. (NYSE:SPGI) provides the global capital and commodities markets with transparent, unbiased ratings, benchmarks, analytics, and data. This is an important benefit since it gives the company a competitive advantage, builds the company’s reputation, and helps it draw in and keep customers.
S&P Global Inc. (NYSE:SPGI)’s credit ratings and indexing revenue streams are well-known to many of us. However, the company has recently developed more depth than most people realize, having tapped into new business opportunities such as market intelligence, mobility, and commodity insights. As a result, S&P Global can be viewed as an integrated business with multiple renewed growth opportunities.
Strong demand for S&P Global’s data and analytics solutions caused its second-quarter 2024 revenue to soar by 14% YoY to $3.549 billion. Its operational profit margin after adjustments rose by 50.7% YoY. The firm raised its full-year expectations after reporting better-than-expected earnings, predicting revenue growth of 8% to 10% and adjusted EPS between $14.35 and $14.60.
The prospect of interest rate cuts and a soft landing for the economy, in which inflation declines without a recession or significant job losses, has spurred investors to spend more on products that aid in making better investment decisions, benefiting companies such as S&P Global.
Artisan Global Discovery Fund stated the following regarding S&P Global Inc. (NYSE:SPGI) in its Q1 2024 investor letter:
“We ended our investment campaigns in BJ’s Wholesale Club, Moncler and S&P Global Inc. (NYSE:SPGI) during the quarter. We assumed shares of S&P Global when it merged with IHS Markit. S&P Global is one of the largest credit rating agencies globally and a provider of benchmarks, data and analytics for the global capital and commodities markets. The company has gone through a free cash flow expansion period due to cost-cutting exercises driven by the merger. However, we believe that opportunity is maturing. Furthermore, recent earnings results displayed disappointing forward guidance, including lower rating revenue growth. Given the slowdown in the profit cycle, we decided to exit our position.”
Unexpected economic downturns that could lower demand for S&P Global’s data and analytics products as well as heightened competition that could put pressure on the company’s pricing power and market share are the company’s main risks. Furthermore, any postponement of interest rate reductions may have an effect on the company’s growth prospects.
However, with a “Buy” rating, the average 12-month price objective for SPGI stock, as estimated by 11 analysts, is $537.82. The average target suggests a 9.17% rise from the $492.65 stock price as it is right now.
Overall SPGI ranks 8th on our list of the best financial services stocks to buy. While we acknowledge the potential of SPGI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SPGI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.