Financial Services: Tough Year Continues for the Sector

It has been a forgettable year for financial services companies, with rippling concerns about artificial intelligence disruption weighing heavily on share prices for wealth managers, boutique investment banks, financial data companies, insurance brokers, and alternative asset managers at various points. Even banks saw a (short-lived) selloff as investors continued grappling with a shifting competitive environment.

Compounding the industry’s woes, stubbornly higher inflation drove the Federal Reserve to raise interest rates for the first time since 2023 in September, citing concerns about everything from debt issuance volume to alternative asset manager realization and deployment activity to the impact on consumer balance sheets. The net effect has been significant underperformance relative to the Morningstar US Markets Index.

Disappointingly, we don’t see an immediate catalyst for a reversal, and the sector looks generally overvalued today. In the banking, asset management, and insurance sectors, we have no 5-star calls, with investable opportunities concentrated among firms where market mispricing reflects our view that real risks facing affected companies are discounted more than warranted. Examples of this include payment companies, navigating an intense period of competitive pressure from fintech disruptors; mortgage-related companies like Rocket, which are afflicted by higher rates that will eventually abate; and wealth managers, which are afflicted by AI disruption concerns, both relating to the long-term value of advice and to the still-hypothetical risk of AI-enabled cash management.

This quarter, we published our inaugural investment banking and trading pulse report, which highlighted the truly unbelievable recent growth we’ve seen across the industry. Combined banking and trading revenue hit $280 billion on a trailing 12-month basis for the firms in our coverage (up 34% annually), driving record returns on equity: 22.4% for US banks, compared with 15.7% on average over the past half-decade. Results look particularly vertiginous in equity trading, where banks appear to be meaningfully over-earning.

Top Financial Services Sector Picks

Nu Holdings NU

• Fair Value Estimate: $16.60
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Nubank has rapidly become Brazil’s largest online banking service provider, thanks to its industry-leading profitability and lean operating structure. The firm plans to extend its growth profile by exporting its cost-advantaged operating model to other Latin American markets and the United States. We think the shares overcorrected in the first half of 2026 after rising unemployment and higher inflation in Brazil sent them spiraling. While the shares have partially recovered, they still trade below our fair value estimate, as we believe the market is discounting them too heavily for lingering credit quality concerns.

Fiserv FISV

• Fair Value Estimate: $106.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

While we recognize the company faces significant issues and 2026 has been a reset year, we think the market has overreacted to Fiserv’s recent difficulties. We think the company retains a moat on both sides of its business, with a scale-driven cost advantage for its merchant acquiring and issuer processing businesses, and its bank tech operations enjoying high switching costs. Further, we think Clover has ongoing opportunities to monetize its SMB clients and shows it can adapt successfully to industry changes. We think the company can stabilize its operations, and our projections call for mid-single-digit top-line growth and stable margins going forward. With shares trading at a double-digit free cash flow yield, we see the market valuation as overly pessimistic.

LPL Financial Holdings LPLA

• Fair Value Estimate: $543.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

After a selloff early in 2026, LPL has executed on one of the two key pillars needed for the business to converge with our estimated fair value: returning to mid- to high-single-digit growth in organic net new asset growth. Looking ahead, it will need to either introduce a credible alternative monetization strategy for client sweep cash, which represents 30%-35% of gross profit today but is perceived to be at risk from AI disruption, or else exhibit signs that the AI-enabled cash management risk is a non-issue. The latter seems more likely to us, likely driven by rising client cash balances after any market selloff.