2 stocks that might be stronger than you think

IInvestors had a lot to weigh in this year, with inflation at its highest level in over 40 years. To bring inflation down, the Federal Reserve is raising interest rates at the fastest pace in decades. This has caused market volatility and sent stocks to their worst six-month start in more than 50 years, and many experts fear a recession is imminent.

However, one industry that is giving the economy the green light is the credit card industry. American Express (NYSE:AXP) and Discover financial services (NYSE:DFS) recently shared their views on the consumer and the current state of the economy – who might be in a stronger position than you think. Here’s why.

Image source: Getty Images.

Credit card payment volume increased over last year

American Express and Discover Financial Services operate payment networks that facilitate consumer spending with credit cards and other types of payment. Credit card companies give an idea of ​​the health of consumer spending, which is at the heart of a healthy economy.

American Express posted solid growth in the second quarter, with net sales up more than 31%. The company saw its network volume, the total dollar amount of payments billed and processed, increase 28% year over year.

It benefited from the tailwinds of the recovery in the United States and around the world, and travel and entertainment spending rebounded, surpassing pre-pandemic levels in April. CEO Steve Squeri said the rebound in travel “has been faster and stronger than expected.”

Discover saw its lending grow 13% from a year ago, but its revenue fell 10%. This decrease is mainly explained by a difference in the performance of its investments. Last year it recorded a gain of $729 million on its books and this year it recorded a loss of $42 million. A positive sign was its net interest income, up 14% due to higher interest rates and increased credit card usage compared to a year ago.

Both companies expressed little concern over credit performance

Both American Express and Discover noted that consumer behavior and loan portfolio performance were robust in the second quarter and that these do not suggest an immediate downturn in the economy.

American Express recorded cardholder loan write-offs of 0.8% in the quarter, compared to 1% in the same quarter last year. It also had a provision for credit losses of $410 million, which it had built up due to larger loan balances and a slightly worse economic outlook from the first quarter. Loan loss reserves represent 3.1% of its total loan balances – which remain below pre-pandemic reserve levels.

Discover recorded charges of 1.8%, down from last year’s charge rate of 2.12%, while chargebacks increased slightly from 1.35% last year to 1.63% this year. CEO Roger Hochschild said “the behavior and trends in our consumer loan portfolio currently do not suggest a downturn is imminent.” He said labor markets remain tight and employment conditions are supporting consumer spending and strong credit performance.

A chart shows Discover's net write-off rate and loans 30 days past due.

Image source: Discover Financial Services. NCO is the net charge rate and DQ is the delinquency rate.

Takeaway for investors

American Express and Discover are in an excellent position to assess the consumer from a spend perspective. From their perspective, consumers remain healthy and continue to spend and pay off their balances, and high inflation has modestly helped businesses through higher transaction volumes.

Both companies noted that rising unemployment rates could ultimately hurt their business. While some companies have talked about slowing hiring, American Express management doesn’t see it as wide-ranging or large-scale at this time. Not only that, but both companies are in a good position as they serve high-end customers who may be more resilient to inflation and a potential economic downturn. Overall credit performance is strong and they believe travel and entertainment will remain in high demand for the foreseeable future.

Although there are concerns of a possible recession on the horizon, American Express and Discover report that the consumer is in good health and businesses should continue to perform well despite inflation, unless the market employment changes drastically for the worse.

10 stocks we prefer to American Express
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Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in the stocks mentioned. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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