The S&P 500 had a bit of a tumble earlier this month, with downward volatility plaguing most US stocks following the threat of a new global trade war. Investors’ nerves have since started to settle as delays, exemptions, and negotiations have started emerging.
However, with US inflation expected to rise sharply in the near term, various financial institutions have increased their estimates on the probability of a recession. For example, JP Morgan currently places a 60% chance of an incoming US recession, with Goldman Sachs having an equally concerning projection of 45%.
However, stock market corrections and crashes are often some of the best times to invest. After all, some terrific businesses often go on sale as panicking investors throw the baby out with the bathwater. And one S&P 500 stock from my portfolio I’ve got my eye on right now is Mastercard (NYSE:MA).
Payment processing vs recessions
Let’s assume the worst-case scenario and say the US does indeed fall into a recession. That’s bad news for Mastercard as it will likely translate into reduced consumer spending. Less spending means lower transaction volumes moving through the fintech’s payment network, resulting in weaker revenue and earnings. And this problem will likely only be compounded if other economies around the world suffer at the hand of higher import taxes.
Needless to say, that’s not something investors will want to see. Even more so from a business that’s trading at a fairly premium valuation of 37 times earnings. With that in mind, it’s not surprising that the Mastercard share price fell by over 12% when tariffs were initially announced. And while the shares have recovered slightly, signs of global economic weakness could see Mastercard shares steadily slide.
Thinking long term
While the near-term outlook for this payment processor appears bleak, the long-term picture hasn’t really changed. The number of issued cards continues to grow steadily and now stands at 3.5bn, with global gross dollar transaction volumes maintaining double-digit growth in the latest quarterly results.
Subsequently, the firm continues to be a free cash flow generating machine with almost $9bn of cash & equivalents sitting on the balance sheet, steadily buying back shares. As a result, zooming out to the last 10 years reveals a fairly consistent upward share price trend that analyst forecasts suggest is set to continue in the long run.
This consistency in beating expectations and generating value for shareholders is why Mastercard is among my larger holdings. And it’s also why I’m always keen to snap up more shares whenever they take a tumble.
However, past performance is no guarantee of future results. And one prominent threat that could handicap the group’s growth is the increasing number of regulatory challenges. In particular, pressure is mounting for Mastercard to cut its transaction fees from various merchant groups – a decision that the firm could be forced into by antitrust regulators.
It’s a risk I’m happy to take. But it’s a threat investors need to mull over when considering an investment in this S&P 500 business.
