As the US financial sector enters the latest earnings season, Morgan Stanley has released a research report outlining its outlook. The firm believes that a defensive posture remains necessary over the next 12 months, as inflation and labor market dynamics are expected to impact credit performance and consumer confidence. Across the consumer finance industry, Morgan Stanley notes that target stock prices have been steadily revised upwards since the beginning of the year, while earnings expectations have largely remained unchanged. The bank also acknowledges that its own report exhibits similar behavior, with target prices and forecasts remaining relatively conservative. Morgan Stanley's base case scenario is that the stocks it covers will achieve returns around their long-term average by 2026, but with a moderate degree of downside asymmetric risk.
Notably, as the report was published, former President Trump proposed last Friday that card issuers be required to cap credit card interest rates below 10% for one year, with an expected implementation date of January 20. Given the lack of detail and significant uncertainty regarding whether and how such a proposal could be enforced, Morgan Stanley anticipates increased volatility in the financial sector in the near term. The bank argues that if implemented, a rate cut of this magnitude would fundamentally reshape the credit card industry, severely reducing issuer profitability and limiting consumer access to credit. Currently, Morgan Stanley views this as a high-risk, low-probability event that would likely face significant legal challenges. Consequently, the firm has not altered its fundamental outlook for the sector but emphasizes that heightened uncertainty could pressure valuation multiples.
The US consumer finance industry stands at a crossroads in the fourth quarter of 2025. Despite persistent inflation and a cooling labor market, the US economy has shown resilience—GDP growth has exceeded expectations, although the pace of job growth slowed by year-end. Non-farm payrolls increased by only 50,000 in December, missing expectations and declining from previous months; yet, surprisingly, the unemployment rate fell to 4.4% from 4.6% in November. This environment of "low hiring, low firing," where companies retain staff without aggressively expanding, may confirm concerns about weakening labor market momentum, even as layoffs remain contained.
Against this backdrop, the growth of US consumer spending appears to have slowed by the end of the year. Morgan Stanley's analysis of JPMorgan Chase consumer data indicates that spending in December grew 2.4% year-over-year, down from 3.7% in November. While spending on non-essential items continued to outpace essential goods, the growth rate for both categories decelerated. Morgan Stanley observes a slight divergence between non-essential and essential spending, highlighting a persistent dynamic: the widening gap between high-income and low-income households. Affluent consumers, benefiting from stable employment and asset appreciation, remain resilient, while lower-income families continue to grapple with high inflation and slowing wage growth. As a result, and somewhat unexpectedly, growth in non-essential spending continues to outstrip that of essential spending.
Although geopolitical news has been frequent, its direct impact on consumer finance has been limited so far. The market remains highly focused on domestic economic fundamentals, and Morgan Stanley expects that recent global developments are unlikely to substantially disrupt the sector's trends in the short term. Looking ahead, Morgan Stanley anticipates that inflation and labor market conditions will remain the primary focus for both investors and operators. While the potential for surprises—both positive and negative—exists, the underlying resilience of the sector should help cushion short-term volatility.
When weighing these complex factors, Morgan Stanley maintains a stance of selectivity and rigor. Full valuations, uneven credit trends, and execution risks within its coverage universe collectively contribute to a more balanced and differentiated outlook. Based on these dynamics, Morgan Stanley has made the following rating and target price adjustments for selected financial stocks:
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