State Street Stock Has A 45% Upside To Its Pre-Inflation Shock

State Street stock (NYSE: STT) currently trades at $72 per share, around 31% below (45% upside) its level of $104 on January 15, 2022 (pre-inflation shock high), and seems like a good investment opportunity. State Street saw its stock trading at around $62 at the end of June 2022, just before the Fed started increasing rates, and is trading 16% above that level. In comparison, the S&P 500 gained about 19% during this period. Further, the stock price has suffered over the last five months due to the fear of a financial slowdown and tough macroeconomic conditions. This was despite a drop in the inflation rate in response to the Fed’s aggressive rate hike plan and positive growth in State Street’s revenues.

Returning to the pre-inflation shock level means that STT stock will have to gain around 45% from the current levels. However, we do not expect that to materialize any time soon, and estimate State Street’s valuation to be around $77 per share. This is because the company’s revenues growth rate is in low single-digits (3% y-o-y in the first half of 2023) due to a drop in total fee income. In addition, the difficult macroeconomic conditions have negatively impacted investor confidence, and made them concerned about a potential recession.

Our detailed analysis of State Street’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline 
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses

In contrast, here’s how STT stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

STT and S&P 500 Performance During 2007-08 Crisis

State Street stock declined from nearly $71 in September 2007 (pre-crisis peak) to below $25 in March 2009 (as the markets bottomed out), implying STT stock lost almost 64% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $44 in early 2010, rising 72% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

STT Fundamentals Over Recent Years

State Street revenues marginally decreased from $11.8 billion in 2019 to $11.7 billion in 2020 due to lower net interest income (NII). While the net interest income continued to suffer in 2021, the revenues still increased by 3% due to growth in servicing fees and investment management fees. However, the trend reversed in 2022, as the NII improved due to interest rate hikes but servicing and management fees decreased because of a drop in asset valuations. The firm posted a meager 1% rise in 2022 revenues.

Similarly, earnings increased from $5.43 in 2019 to $7.28 in 2022.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe State Street (STT) stock has the potential for strong gains once fears of a potential recession are allayed.

State Street stock looks undervalued right now and we expect reasonable returns from the stock in the near-to mid-term. But what if you’re looking for a high-performance portfolio with a low downside instead? The Trefis Reinforced Value portfolio has beaten the market consistently while limiting losses during periods of sharp market declines.

[1] Month-to-date and year-to-date as of 8/16/2023
[2] Cumulative total returns since the end of 2016

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