Financial Services: US Firms Performed Well in 2025, but Valuations Are Starting to Look Stretched

The financial services sector performed well in absolute terms in 2025, with the index rising 16.68% on the back of a more constructive regulatory environment, strong performance in both asset-based and transaction-based businesses, and amid expectations for a steepening yield curve as Federal Reserve interest rate cuts take hold. Given only proximate exposure to prevailing AI trends, that mid-teens appreciation still fell slightly short of the broader US equity market index at 17.35%. If the US economy can avoid a recession—currently our base case—then this could underpin a favorable backdrop for M&A deals, IPOs, and investor risk appetite. Adding fuel to the fire is an estimated $4.6 trillion in alternative asset manager capital and $4 trillion in PE investments in play, which should eventually drive a long-anticipated M&A super cycle.

Still, we’re concerned with small fissures emerging in the labor market and expectations for slowing real GDP growth in the United States, which rarely correspond with the record valuations we’ve seen in recent months. There’s plenty to be optimistic about in the real economy, from the prospect of tax cuts and growing business investment appetite to waning tariff-induced uncertainty, but it’s hard not to exhibit some concern with prevailing valuations, which look increasingly rich. Market-cap-weighted price/earnings multiples among banks are pushing into the mid-teens (15.3 times on Dec. 15), despite what appear to be peak-cycle earnings in large lines such as institutional trading and asset and wealth management, while bottom-up valuations suggest that the industry is 20% overvalued. Custody banks (28% overvalued), investment banks (22% overvalued), consumer finance companies (24% overvalued), and even payment companies (3% overpriced, albeit with heavy dispersion) all look expensive. What scant opportunities we see come from financial data companies and wealth managers.

We expect solid growth for the financial services sector, with our 5.4% median revenue growth forecast slightly nudging our expectation for 4.4% annual growth in nominal US GDP over the same period, driven largely by a skew toward higher-quality companies taking market share. In general, investors should expect financial services revenues to match or slightly lag broader nominal GDP growth and to move largely in tandem, with the two closely linked (after all, financial services companies are largely facilitators of capital flows and risk, the engines of economic growth). That’s a small step down from 6.1% over the prior half-decade, although most of that is driven by differences in inflation.

At the industry level, we prefer asset manager prospects (market-cap weighted), with alternative asset managers’ prospects looking strongest: higher deployments and higher realizations should drive a surge in incentive fees (think carried interest) that largely flow to the bottom line. Insurance companies look in the worst position, with returns on equity for property and casualty insurers almost inevitably normalizing after a period of hard pricing, strong investment income, and outstanding results, including 24% 2024 ROEs. Industry results will be better than the chart indicates; we expect low-single-digit annual operating profit growth (2%) excluding Berkshire, which generated significant gains from sales of investments in 2024, skewing results.

Top Financial Services Sector Picks

LPL Financial Holdings

• Fair Value Estimate: $504.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

LPL Financial LPLA has been weighed down by concerns about its exposure to falling short-term interest rates, with cash sweep income accounting for 30% of gross profit. We believe that the market overestimates the firm’s sensitivity to declining short-term interest rates, with 50%-75% of its ICA cash sweeps invested at fixed rates further out on the yield curve, where we expect significantly less pressure. The core business also looks extremely healthy, benefiting from secular tailwinds such as the transition to the independent advisory channel and from strong recruiting success among hybrid RIA and institutional advisors. We expect 10-year compound annual growth rates of 12.9% for revenue and 11.7% for gross profit.

Broadridge Financial Services

• Fair Value Estimate: $290.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

Growth from indexing and fractional share trading should continue to underpin durable revenue growth for Broadridge BR, which the market tends to underappreciate. We continue to expect billable equity position growth of 10% per year over the 2025-29 period and strong mid-single-digit top-line growth overall, with the financial services infrastructure provider’s wide moat looking intact to us. Recently, markets have exhibited concern regarding tokenization of public equities, but we continue to view the dominant-use case for that nascent technology as facilitating trading in illiquid assets. Strong public market liquidity seems to render tokenization a solution to a problem that doesn’t really exist.

TransUnion

• Fair Value Estimate: $115.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

TransUnion TRU is one of the big three US consumer credit bureaus, along with Equifax and Experian. Its core business is selling credit reports to US lenders, although the firm has recently expanded into emerging applications in other financial services end markets and consumer-facing services. We believe that the market is overly harsh regarding mortgage origination volumes in particular and consumer credit in general, with high-single-digit annual growth looking achievable to us, at attractive high-30% adjusted EBITDA margins. Shares aren’t priced accordingly, and the firm trades at a discount to lookalike peers.