Financial Services: Rough Year for the Sector Amid AI Concerns and Private Credit Weakness

The financial services industry is one of the worst-performing groups over the past year, with trailing 12-month returns lagging the Morningstar US Market Index. We chalk this up to the twin headwinds of fears regarding AI disruption and weakness in private credit.

Regarding the former, some trepidation is warranted. Workflow-driven moats look more vulnerable than they have in some time, driving our decision to downgrade the economic moat of FactSet—largely a data aggregator—to none from narrow, alongside a handful of similarly motivated downgrades across the industry and our broader Morningstar coverage. But we’d point out to investors that the selloff is somewhat indiscriminate, while idiosyncratic impacts are likely to vary widely. For example, we expect limited impact from still largely hypothetical AI cash management tools, yet shares of wealth managers like Charles Schwab have sold off significantly regardless.

Considering the latter, we now expect roughly half the organic asset inflows into private credit strategies for the alternative asset managers in our coverage, and we highlight that similar episodes—like with wide-moat Blackstone’s BREIT product—took years to recover. Notwithstanding this pressure, we see very little credit risk for those firms, given the structure of their funds, and believe that the market’s reaction is a bit of an overcorrection, underpinning investable opportunities in names like Blackstone. The throughline from these episodes is that broad selling pressure has created select opportunities, particularly among capital markets firms, for judicious investors.

Although many financial services firms have struggled to shed the perception of AI vulnerability, investment banks have enjoyed a strong start to 2026 on the back of a reopening IPO market and improving corporate confidence. This drove 60% growth in combined advisory and equity capital markets revenues—the two most profitable investment banking categories—during the most recent quarter. Married with still-strong trading revenue growth, the banks we cover have seen average price appreciation of 40% over the past year.

Top Financial Services Sector Picks

Charles Schwab SCHW

• Fair Value Estimate: $117.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Schwab has been battered by fears regarding AI-enabled cash management tools, a still-hypothetical risk that fails to hold water in our view when considered against a handful of practical realities. Consider the very competitive all-in cash yields for the firm’s clients, the limited net benefit (even at quite high short-term interest rates) for the average Schwab customer, the significant liability and privacy concerns, and the challenges tied to customer acquisition (as we saw with robo-advisors). Schwab is the highest-quality company under our wealth management and retail brokerage coverage, and we expect nearly 13% compound annual EPS growth over the next decade despite the firm’s scale.

S&P Global SPGI

• Fair Value Estimate: $505.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Overall, we are constructive on S&P Global, and view shares as attractive based on our fair value estimate. AI disruption concerns have weighed heavily on information services stocks, but we see these risks as often overstated. In our view, AI disruption concerns have little applicability to wide-moat benchmark businesses of ratings, indexes, and energy. In addition, bond issuance growth has been robust, and the spinoff of Mobility Global further streamlines the firm’s operations. At current levels, shares trade at 19 times our 2027 adjusted EPS estimate, well below the three-year average forward P/E of 27 times.

Bank of America BAC

• Fair Value Estimate: $65.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Bank of America benefits from one of the lowest-cost retail deposit franchises in the United States, leaving it well-poised to navigate industrywide funding cost pressures. The firm is the primary bank for 92% of its retail clients and has forged deep relationships with both its consumer and commercial customers over decades. The firm’s strong suite of fee-based products allows for efficient revenue generation and cross-selling, with Bank of America generating among the strongest post-provision net revenue per dollar of risk-weighted assets in the industry. We think the market underappreciates many of these factors.