The S&P 500 and the Nasdaq Composite index have been on a tear as the Magnificent Seven stocks continue to lead the market higher. However, one key to building long-term wealth as an investor is diversifying your investments across different market sectors.
One area of the market you should consider investing in is capital markets. Companies in this industry ensure markets function by facilitating the buying and selling of stocks, bonds, and other assets. In recent years, market conditions have weighed on many across the sector, creating good opportunities for long-term investors. Here are three no-brainer capital markets stocks to scoop up today.
1. Goldman Sachs
It’s been a roller coaster ride for Goldman Sachs (NYSE: GS) investors over the last few years. Red-hot initial public offering (IPO) markets helped propel the company to a record year in 2021. Then, with inflation remaining stubbornly high, the Federal Reserve began raising interest rates, leading to a volatile 2022 for stocks and bonds.
Companies considering an IPO put those plans on ice until capital market conditions were more favorable. Not only that, but companies also hesitated to issue much debt until interest rate volatility subsided. Goldman Sachs’ investment banking arm took a big hit as revenue fell 56% over the last two years.
Conditions are improving, and more companies are dipping a toe into the IPO waters. In the first quarter, Goldman’s investment banking fees grew 32%. Large IPOs, including Reddit, had a “strong reception,” according to CEO David Solomon, and this is “the latest sign that investors’ risk appetite is growing.”
Goldman Sachs is priced at around 11.8 times its forward earnings and looks ripe for the picking for investors as capital markets warm up.
2. Interactive Brokers
Interactive Brokers (NASDAQ: IBKR) provides investors with a comprehensive trading platform that caters to more advanced investors. Its growth is undeniable. Since 2017, the company’s cleared customer accounts have gone from 483,000 to 2.75 million, a 469% increase in a little over six years.
The drivers of Interactive Brokers’ growth are its low commissions, advanced trading platform, focus on tech-savvy investors, and high interest rates offered on customers’ uninvested cash.
The company is led by a slew of software engineers in senior management positions, showing its commitment to automating as much of the business as possible. Automating the business not only helps bolster Interactive Brokers’ position as a low-cost provider but also helps it generate impressive margins.
Trading volumes continue to pick up for the broker, and at 18.9 times forward earnings, the fast-growing company looks reasonably priced to buy right now.
3. Charles Schwab
It’s been a tough couple of years for Charles Schwab (NYSE: SCHW), which struggled with sizable deposit outflows. Schwab has historically relied on low-cost deposits to help fund its business, which has driven a solid return on equity over the last decade and a half.
However, the higher-interest-rate environment has had clients moving their cash balances over the higher interest-earning assets, a phenomenon Schwab calls “client cash sorting.” From August 2022 through April 2023, Schwab’s total bank account deposits fell by 32%.
Schwab had to borrow funds through available lending facilities, like the Federal Home Loan Bank (FHLB), to ensure it had enough capital to prevent a liquidity problem if there were a run on the bank.
Things have been looking up for the company as it pays down those higher-cost debt arrangements. Deposit outflows continue, albeit at a drastically slower pace. Stabilizing interest rates benefit Schwab, and they stand to get an even bigger boost if rates fall. According to the CME FedWatch Tool, markets are pricing three 25-basis-point interest rate cuts over the next year.
On the surface, Charles Schwab stock looks expensive, at around 30 times earnings. However, with analysts projecting income to pick up over the next couple of years, Schwab stock is priced at 16.5 times next year’s earnings, making now an excellent time to scoop up shares.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Charles Schwab and Goldman Sachs Group. The Motley Fool recommends CME Group and Interactive Brokers Group and recommends the following options: short June 2024 $65 puts on Charles Schwab. The Motley Fool has a disclosure policy.
3 Capital Markets Stocks to Buy Hand Over Fist in June was originally published by The Motley Fool
This news story highlights the opportunities in the capital markets sector and provides insights into three top stocks to consider investing in. It discusses the recent performance of Goldman Sachs, Interactive Brokers, and Charles Schwab, along with key factors influencing their growth potential. The article also includes expert analysis and recommendations for investors looking to diversify their portfolios and capitalize on the current market conditions.
