With worries over tariffs, a weakening labor market and inflation all on the rise, investors are increasingly looking for stocks that could weather a recession if one begins in the next year.
One stock that could be worth looking at for this purpose is American Express (NYSE:AXP), one of America’s large credit card providers and a business that has been part of the American financial landscape in one form or another since its founding in 1850.
Is American Express stock recession-resistant, and could shares of AXP be worth buying today to hedge against a possible downturn?
Will American Express Be Recession Resistant?
To understand how American Express could perform in the event of a recession, it’s first important to understand how its business model differs from those of other credit card companies. Unlike card networks such as Visa and Mastercard, American Express operates as a closed-loop credit card business.
This means that it issues its own cards with annual fees and collects cardholder payments directly, as well as earning money from merchant fees. This end-to-end approach gives Amex more opportunities to earn money from transactions, particularly when cardholder spending is high.
For this reason, American Express tends to offer significant rewards to its cardholders to encourage additional spending on their Amex cards. This, in turn, generates revenue for the business in the form of merchant fees and interest income. The rewards that Amex offers could be its key to staying afloat through a recession, as cardholders tend to perceive American Express as a good value in spite of its fees.
American Express’s habit of charging fees that can range into the hundreds of dollars annually for its premium cards has also tended to help it cultivate a fairly affluent user base. This fact significantly reduces its risks in the event of a recession, as the demographics that tend to use American Express are the most likely to keep spending and the least likely to default on debt payments. At the moment, affluent Americans are also disproportionately propping up the consumer marketplace, with the top 20 percent of earners making up over 50 percent of all consumer spending.
It’s also worth noting that American Express has managed to create an additional moat around its brand by cultivating a reputation as a status symbol among younger consumers. This luxury status could help Amex keep its cardholder base up, even if higher-income consumers start to cut back on subscriptions and other recurring expenses.
Cumulatively, these factors paint a fairly optimistic picture for Amex in the event of a recession. With a user base that is likely to be less impacted by an economic downturn in place, American Express could keep benefiting from its end-to-end approach to the credit card business, all while continuing to offer incentives to spend through its generous rewards and perks. As such, American Express’s business model and current market position seem to favor the argument that the business is fairly recession-resistant.
How Is American Express Faring Now?
American Express is currently flying fairly high in what is becoming a challenging market environment, a fact that somewhat reflects the economic resilience of its more affluent cardholder base. In Q2, Amex reported record revenue of $17.9 billion, though its GAAP net income was down by about 2 percent to $2.9 billion. Adjusted EPS, however, came in very strong at $4.08, about 17 percent higher than in the year-ago quarter.
Is AXP in a Fair Value Range?
Another factor to consider about how well American Express shares could perform in the event of a recession is the stock’s current valuation. AXP currently trades at 24.0 times earnings and 3.1 times sales. This places it at a sharply lower valuation than Visa and Mastercard, which trade at 33.2 and 38.7 times their trailing 12-month earnings, respectively.
With that said, American Express is trading slightly above the analyst consensus price target of $326.58. From its current price of $342.31, this forecast would imply a downside of about 4.2 percent. As such, AXP is probably around a fair valuation but is likely not undervalued.
Could AXP’s Dividend Help Investors Weather a Recession?
Historically, dividend-paying stocks have proven to produce somewhat better returns during recessions than those that don’t offer cash distributions. While American Express does pay a dividend, the quarterly payout of $0.82 per share equates to a yield of only about 1.0 percent at today’s prices.
This puts AXP well below both the sector average yield of 3.1 percent and the S&P 500’s average yield of 1.2 percent. So, while American Express’s dividend may help to slightly bolster returns in the event of a recession, it likely isn’t significant enough to make a large difference.
Is American Express Recession-Resistant?
On the whole, the outlook for American Express if a recession sets in looks fairly positive. With its focus on higher-income cardholders, the business could see less downward pressure than competitors like Visa and Mastercard. The basic model of generating revenue across the credit card transaction chain, likewise, could give Amex an edge and help it keep its cardholders spending by supplying rewards paid for with merchant fees and interest payments.
It’s also helpful to look back at how American Express has performed in past recessions to get a sense of how it could handle a future one. Unsurprisingly, AXP sold off significantly during both the 2008 financial crisis and the stock market rout that followed the onset of the 2020-21 era. In both cases, however, the stock not only bounced back but also moved well above its previous highs.
Like almost any stock, American Express could see meaningful downward volatility if a major recession were to begin in the near future. Both the characteristics of the business itself and the stock’s history, however, suggest that American Express is well-equipped to weather recessions and come out strong on the other side. As such, AXP could be a good stock to own in the event of a recession in 2025 or 2026, especially in light of the fact that the stock appears to be more or less fairly priced at the moment and likely isn’t carrying as much of a valuation premium as many other stocks today.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.