Among the major stock exchanges in the United States, the Dow Jones Industrial Average Index fared the best in 2022, declining just 8.8%. On the other hand, the S&P 500 Index and the tech-heavy Nasdaq Composite Index tumbled 19.4% and 33.1%, respectively.
The Dow Jones, the 30-stock blue-chip index, had rallied almost 19% in 2021. But higher interest rates (the central banks across the globe tightened the monetary policy), 40-year-high inflation, geopolitical tensions and economic uncertainty (heightened risk of a recession in the near term) roiled the markets in 2022, with the index slipping into the bear market in September-end. Further, a resurgence of COVID-19 cases in China has slowed down economic activities across the country, adding fuel to the fire.
The outperformance of the Dow Jones index was driven by its exposure to cyclical sectors like energy, industrials and financials. These sectors performed well last year, with energy being the best performing on the higher oil price. Additionally, industrials gained strength on improving manufacturing and industrial activities, while the financial sector received a boost from rising interest rates. Today we are looking into the performance of four financial services stocks – JPMorgan JPM, Goldman Sachs GS, Visa V and American Express AXP – that are part of the index.
In 2022, shares of JPM, GS, V and AXP lost 15.3%, 10.2%, 4.1% and 9.7%, respectively. The beaten-down stock prices might turn out to be an attractive entry point for investors in these quality franchises.
Performance in 2022
Image Source: Zacks Investment Research
While the Federal Reserve’s efforts to curb inflation by raising interest rates will benefit the finance sector stocks, the expectations of economic slowdown/recession in the near term remain a big headwind. Until now, cooling consumer prices, rising consumer confidence, a solid job report and strong manufacturing activity suggest that a large part of the economy is holding up well. But higher rates have made borrowing expensive, pushing up the cost of buying a new car or house, increasing the cost of carrying credit card debt and thus heightening the risk of a recession.
Hence, investors are cautious about entering the stock markets. Nonetheless, this is the best time to invest in quality stocks that are fundamentally strong and will bounce back resoundingly once these concerns go away.
Let’s now discuss the above-mentioned four Dow finance stocks in detail.
JPMorgan is the largest bank (in terms of consolidated assets and market cap) in the United States. The company is a bellwether in the banking space, given the sheer size (serves more than 66 million U.S. households) and quality of its asset base and industry-leading franchises in investment, commercial and consumer banking businesses.
JPM’s balance sheet is highly asset-sensitive, and rising rates will support top-line growth. The bank has been extensively investing in technology to stay ahead of its competitors, which include not only other banks but also technology firms. The company has been growing through on-bolt acquisitions too.
After consolidating its branch network for several years, this Zacks Rank #3 (Hold) company announced an initiative in 2018 to expand in new regions by opening branches. It has made substantial progress on this front, having already added more than 230 new branches and has a presence in 48 of 50 U.S. states. This bodes well in garnering market share and offers solid cross-selling opportunities in the card and auto loan sectors. It is also expanding operations overseas, in China and Europe.
Despite a challenging operating environment, JPM’s deposits and loan balances have remained strong. Though loan demand has been subdued since the onset of the coronavirus pandemic in 2020, there has been a marked improvement in the same of late.
The Zacks Consensus Estimate for earnings for 2022 and 2023 has moved slightly north over the past month.
Goldman, one of the major players in IB business, is undertaking measures to diversify operations. The company is making efforts inorganically to boost asset management and wealth management businesses while expanding its digital consumer banking platform – Marcus by Goldman Sachs.
In August 2022, this Zacks Rank #2 (Buy) company acquired robo-advisor NextCapital. In April 2022, Goldman closed the acquisition of Dutch asset manager NN Investment Partners from NN Group N.V., while in March, the company closed the buyout of GreenSky. In 2020 and 2019, the company acquired Folio Financial and United Capital, respectively. Such inorganic growth efforts will diversify the fee-revenue base and offer top-line stability.
The company’s IB revenues, which witnessed a four-year CAGR of 22.1% (ended 2021), fell in the first nine months of 2022 due to a decline in industry-wide completed M&A transactions. Yet, Goldman’s solid position in worldwide announced and completed M&As will likely give it an edge over its peers. Robust client engagement, backed by digital disruption and transformation trends, and its decent investment banking backlog are other tailwinds.
Also, GS looks undervalued with respect to price-to-earnings (P/E) and price-to-book (P/B) ratios. The stock has a P/E (F1) ratio of 10.89, which is lower than the industry average of 14.50. Also, its P/B ratio of 1.07 is below the industry average of 1.56.
Over the past 30 days, the Zacks Consensus Estimate for 2022 and 2023 has been revised upward.
Visa operates as a payments technology company globally. In recent years, the company has evolved its business to accelerate the migration of digital payments across new channels. It has also adopted new digital payment and security technologies, such as contactless and tokenization.
Visa Token Service, Visa Checkout and Visa In-App Provisioning are some of the digital solutions that have been developed by the company to advance its digital platform. V is also pushing technologies, including contactless and scan-to-pay, tap-to-pay and secure remote commerce, which should be the main modes of payment in the near future. Thus, Visa has significant prospects for growth in the emerging payments industry in the years to come. It is well poised for growth owing to BNPL, crypto and other fintechs.
For Visa, M&As, partnerships and minority investments are some of the ways to achieve robust growth. These moves have helped the company to maintain its leading position in the payment network space. It consistently made efforts to expand its presence in Latin America, South Africa and Europe.
This Zacks Rank #3 company has been witnessing tremendous revenue growth on the back of expanded payments volume and the number of processed. The trend will continue, driven by its strong market position and an attractive core business supported by new deals, renewed agreements, accretive acquisitions, increasing spending via cards, shift to the digital form of payments and expansion of service offerings.
The Zacks Consensus Estimate has remained unchanged over the past seven days for fiscal 2023 and fiscal 2024.
American Express, one of the leading providers of credit payment card products, is expected to witness a solid revenue rise driven by several growth initiatives, such as launching products, enhancing the existing features, modifying prices, reaching agreements and forging alliances, among others. Even though the COVID-led fall in business volumes hampered its top-line growth in 2020, the same has been picking up gradually on rebounding economic growth and increasing consumer spending.
With its new growth plan, AXP anticipates gaining solidly from the improving macro environment. Rising credit card spending will boost its future performance. Management expects revenues to increase 23-25% this year, with the target to achieve growth of more than 10% over the long term.
This Zacks Rank #3 company is working to provide digitized services to its customers. It has acquired a number of digital companies in the past, which along with new digital features and content that AXP is building in-house, will enable its card members to engage more and thus, drive card usage volumes and revenues.
Further, American Express made a significant move in small business banking by acquiring Kabbage, an online lender, in 2020. Since then, the company has been expanding the services offered by Kabbage, which will help rapidly grow its business in the domestic market and diversify revenue sources. The company has formed strategic partnerships with Delta, Hilton and Amazon. It has also announced a new financial advice service with Vanguard.
The Zacks Consensus Estimate for 2022 and 2023 has remained unchanged over the past seven days.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.