The S&P 500 has declined about 6.7% since the beginning of the year (as of this writing) as fears of higher tariffs, stubborn inflation, and fewer interest rate cuts drove away the bulls. In this uncertain market, it might be tempting to simply park your cash in some CDs and T-bills.
That caution is warranted, but investors who shun stocks right now could miss some promising long-term opportunities. One of those stocks is American Express (AXP 1.85%), which still looks like a screaming buy for five simple reasons.
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1. American Express only serves low-risk customers
American Express is often compared to Visa and Mastercard, but it operates a different business model. Visa and Mastercard don't issue any cards of their own -- they only partner with other banks and financial institutions, which issue co-branded cards and handle all the accounts and debt. Therefore, Visa and Mastercard only generate revenue by charging merchants "swipe fees" for each transaction processed through their global card-processing networks.
American Express is both a card-issuing bank and a payment processor, so it shoulders all the risk of the cards it issues. That might seem a lot riskier than Visa and Mastercard's hands-off approach, but it drives American Express to only issue its cards to lower-risk customers with higher income levels and healthy credit scores.
At the end of 2024, only 0.8% of American Express' consumer and small business loans were delinquent by more than 30 days, compared to a ratio of 1% at the end of 2023. Its total provisions for credit losses only rose 5% to $5.2 billion, or 8% of its total revenue (net of interest expense), in 2024. In other words, it's not exposed to too much credit risk.
2. American Express is resistant to interest rate swings
American Express is well-insulated from interest rate swings. Declining interest rates reduce its banking segment's net interest income, but they'll generate tailwinds for consumer spending and boost its credit card segment's swipe fees. Meanwhile, rising interest rates might soften its credit card business but strengthen its banking business.
That flexibility makes American Express a more balanced investment than payment processors like Visa and Mastercard, or traditional banks. That might be why its stock rallied 45% over the past three years as the S&P 500 only advanced 24%.
NYSE: AXP
Key Data Points
3. Its stock is still reasonably valued
From 2019 to 2024, American Express' revenue and earnings per share (EPS) grew at a compound annual growth rates (CAGRs) of 10% and 12%, respectively. From 2024 to 2027, analysts expect its revenue and EPS to grow at CAGRs of 8% and 13%, respectively.
At $254 a share, American Express' stock still looks cheap at 16.6 times forward earnings. Assuming it matches analysts' expectations and maintains the same valuation, its stock could rise about 41% to $360 by the beginning of 2027.
4. American Express returns a lot of its cash to its investors
American Express generated $12.1 billion in free cash flow (FCF) over the past 12 months. It spent $5.9 billion of that total on buybacks and another $2 billion on its dividends, which it's raised annually over the past four consecutive years. Its forward yield of 1.2% might seem low, but it still has plenty of room for future dividend hikes.
5. Warren Buffett is still bullish
Last but not least, Warren Buffett's Berkshire Hathaway still holds a $41 billion stake in American Express. That massive investment accounts for 14.3% of Berkshire's entire portfolio. It remains the conglomerate's second largest single investment after Apple and its holding gives Berkshire a 21.6% stake in the company.
Berkshire also hasn't sold a single share of American Express since 2012. That's a bright green flag, since Berkshire notably reduced a lot of its top positions -- including Apple and Bank of America -- to raise more cash over the past year.
It's one of the best stocks to buy in this wobbly market
If you expect the market to remain volatile as it grapples with tariffs and other macroeconomic headwinds, American Express could be a great place to park your cash. Its shares probably won't skyrocket, but it will probably help you sleep a lot better at night.
