Financial Services: Concerns About AI Disruption and Private Credit Weigh on Sector
LPL and Blackstone are some of our favored stocks in this sector.
The first quarter of 2026 was rough for financial services firms, best characterized by investor jitters as markets tried to parse the likely impact of artificial intelligence, growing concerns in the private credit industry—somewhat relatedly—and, most recently, the Iran war. Collectively, this drove a significant decline in the Morningstar US Financial Services Index over the past quarter, and it underperformed the broader US Markets Index.
The First Quarter of 2026 Was Forgettable for Many Financial Services Firms
In some areas, those concerns appear warranted. We downgraded many of our economic moat ratings on software firms in response to rapidly improving AI capabilities, with flow-through impacts on those firms’ pricing power, long-term growth prospects, and valuations. With alternative asset managers carrying heavy exposure to those firms across private equity and private credit funds, a roughly 20% decline in share price over the past three months seems reasonable. Neither was the financial services industry spared, as we downgraded our moat ratings to none from narrow for back-office software provider SS&C and financial data company FactSet, reflecting generally improving tools for data scraping and curation, software development, and potentially lower switching costs as the threat grows of natural language prompts replacing console-based workflows.
Following the Market Correction, We See More Opportunity Across the Sector
Notwithstanding these risks, we do see more opportunity in the industry than we have in a handful of quarters, with many of our best ideas in the asset management, capital markets, and credit services industry groups.
Market Rate Expectations Have Drifted Significantly Higher in Recent Months
The market continues to sift through winners and losers in the sector related to the AI theme, as it has across the broader market. We prefer network effect moats and truly proprietary data, while capital provision and complex, relationship-driven industries look proportionately better positioned. Elsewhere, higher interest rate expectations warrant monitoring, with potential benefits for banks’ net interest margins and insurance portfolio yields, but likely headwinds for asset prices, transaction volume, and debt issuance if those materialize.
AI Disruption Concerns Have Centered on Alternative Asset Managers, CRE Brokers
Top Financial Services Sector Picks
LPL Financial Holdings
- Fair Value Estimate: $540.00
- Morningstar Rating: ★★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: High
LPL LPLA has been plagued by slowing organic asset growth and perceived exposure to falling interest rates. The former seems short-sighted, with the firm deploying the lion’s share of its sales representatives toward retaining advisors acquired from Commonwealth Financial Network. With those agreements largely in place, organic growth should accelerate in the second half of the year, assuaging market concerns. Regarding the latter, most of the firm’s sweep cash is held in longer-duration instruments that should be less exposed to any short-term interest rate cuts, which now look increasingly tenuous. We forecast 10- year compound annual growth of 10.0%, 10.8%, and 13.7% for revenue, operating profit, and diluted EPS, respectively.
Blackstone Group
- Fair Value Estimate: $175.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: High
Blackstone BX is the premier alternative asset manager, with nearly $1 trillion in fee-earning AUM. Despite a significant selloff during the first quarter of 2026, driven by concerns regarding private credit in general and exposure to software companies at risk of AI disruption specifically, we believe that the firm’s diversified portfolio should allow it to hold up much better than its public competitors. It remains the top fundraiser in the industry, and notwithstanding genuine pressure for software-focused portfolio companies, we view Blackstone as a long-term winner in the space. The selloff, as it pertains to Blackstone, looks overdone.
MarketAxess Holdings
- Fair Value Estimate: $250.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
After a few notable management missteps, MarketAxess MKTX appears to have righted the ship. The firm should continue to benefit from the ongoing electronic penetration of US corporate debt trading, a key secular tailwind, and it has filled significant gaps in its portfolio trading and dealer-initiated channels. In our view, the market is not fully appreciating the strength of the firm’s international business nor the likely benefits of these recent investments and product rollouts.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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