Policies can have a ripple effect, often going beyond their initial intent. We’re seeing this now from the Federal Reserve, which has made it clear that, in response to stubbornly persistent inflation, it will be holding interest rates higher for longer.
This trend aligns with observations made by David Kostin, Chief US Equity Strategist at Goldman Sachs. Kostin points out that stocks have shown a strong return on equity (ROE) over the past several decades, reflecting a positive combination of profitability and efficiency. However, these prosperous times may be coming to an end as higher interest rates start impacting corporate activities.
“If rates continue to rise or stay higher for longer,” Kostin states in his recent note, “increased borrowing costs would disincentivize companies from taking on greater amounts of leverage.”
To guide investors, Kostin has listed a range of stocks that he believes are “less vulnerable to rising rates and offer stability amid greater macro uncertainty.” Prominent among his picks are credit card issuers and processors. These companies have been benefiting from strong consumer spending in recent years, and the industry giants among them possess the deep resources necessary to weather the impact of rising interest rates. Let’s take a closer look at two of these ‘blue chip’ names.
We’ll start with Mastercard, one of the market’s true ‘blue chip’ stocks. With a market cap of $374 billion, Mastercard is currently the third-largest of the major credit card issuer/processor companies (Visa and JPMorgan Chase hold the first and second spots, respectively) and has been an industry leader since its founding in 1966.
The company has over 3,900 clients in more than 120 countries and handles more than 125 billion purchase transactions annually at more than 80 million merchant locations.
Mastercard will report its 3Q23 results late this month – but a look at the Q2 results is informative. In Q2, Mastercard showed several solid metrics, starting with the gross dollar volume of $2.3 trillion, up 12%…