We recently compiled a list of the 10 Best Financial Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where Mastercard Incorporated (NYSE:MA) stands against the other best financial stocks to buy according to hedge funds.

According to the Business Research Company, the market for financial services has expanded significantly in the last several years and is further expected to grow at a compound annual growth rate (CAGR) of 7.7% in the next few years.

The year 2024 was remarkable for the financial sector, as seen by the Financial Sector Index, which rose over 30% as of mid-December and outperformed the broader market by almost 5 percentage points. This expansion came after worries over mid-sized bank failures in early 2024, which turned out to be isolated events rather than a problem affecting the entire industry.

As of January 7, 2025, the market’s financial sector produced returns of 5.51% over three years, 9.68% over five years, and 9.49% over ten years. These numbers, however, pale in comparison to the sector’s remarkable success during the previous 12 months, which saw a return of 28.01%.

Looking forward, according to Fidelity’s report, the financial industry’s prospects for 2025 seem promising, backed by consistent economic expansion in the United States. It is projected that the Federal Reserve’s move to rate decreases in the second half of 2024 will boost confidence and lower credit risk. Falling rates have the potential to boost lending and deposit growth while also reducing net interest margins.

As per Fidelity analyst Matt Reed:

“Lower rates boost economic momentum, benefiting banks and payment processors alike.”

Banks that are well-diversified and have solid fundamentals are better equipped to handle a soft landing situation. Sensitive to consumer spending, payment processors are likewise poised for expansion as more accommodating monetary policy and strong consumer activity coincide.

Risks still exist, though. As per the aforementioned report, if the economy weakens, some lenders may face difficulties due to their exposure to commercial real estate and possible nonperforming loans. Nonetheless, financials start 2025 with significant momentum due to a less stringent regulatory agenda following the election and more prospects for mergers and acquisitions.

Michael Kantrowitz, chief investment strategist at Piper Sandler stated:

“I think investors have rotated a little bit out of some of the big tech companies and into the big financial companies,”

He claimed that while a lot of optimism about artificial intelligence (AI) is priced into tech businesses, some investor movement made sense since the rate environment has improved for bank earnings.

Deloitte’s 2025 banking and capital markets outlook report states that banks can strengthen their basis for sustainable growth with creativity and discipline as the banking industry adjusts to a low-growth, lower-rate environment. According to the report, the baseline scenario for economic growth in 2025 is projected to fall to 1.5%, with possible deviations between 1.0% and 1.9% due to slowing consumer spending, greater unemployment, and sluggish business investment. By Q2 of 2024, consumer debt had risen to $17.7 trillion, and by March 2024, savings from the pandemic had been spent, further straining the economy. Inflation is forecast to be around 2%, allowing for three to four rate cuts, bringing the federal funds rate down to 350-375 basis points. Treasury yields are projected to fall, and following two years of inversion, the yield curve may normalize. With the exception of economies that are under pressure, global central banks will likely choose to cut benchmark rates.

Methodology

We sifted through holdings of financial ETFs and online rankings to form an initial list of 20 financial stocks. From the resultant dataset, we chose 10 stocks with the highest number of hedge fund investors, using Insider Monkey’s database of 900 hedge funds in Q3 2024 to gauge hedge fund sentiment for stocks.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

Mastercard Incorporated (NYSE:MA)

Number of Hedge Fund Holders: 131

In 2023, Mastercard Incorporated (NYSE:MA), one of the Best Financial Stocks, processed about $9 trillion in transactions, making it the second-largest payment processor globally. The business maintains excellent operating margins, benefits from increased travel, and excels at digital and cross-border payments. The firm processes transactions in more than 150 currencies and has operations in more than 200 countries.

Despite inflation and market challenges, the company has shown strong growth and profitability. Although competition and regulatory scrutiny are risks, Mastercard Incorporated (NYSE:MA) is well-positioned for future growth due to its innovative and strategic investments.

Mastercard Incorporated (NYSE:MA)’s sustainability can be seen in recent financial results. In Q3 of 2024, strong consumer spending and better global macroeconomic conditions drove a 13% YoY growth in revenue. The 10% YoY growth in gross dollar volume and the 17% YoY increase in cross-border volumes point to travel-related and overall spending still being on the rise. Revenue from value-added services increased by 18%, outpacing overall growth, while operating margins increased to 59.3%, resulting in a 16% increase in EPS. The firm continues to provide strong shareholder returns, as seen by its $12 billion authorization for a new share buyback and its $12 billion annual free cash flow. Operating cash flow increased by 58.86% YoY.

James Faucette, an analyst at Morgan Stanley, increased the price objective from $564 to $654 on Mastercard Incorporated (NYSE:MA). According to the company’s 2025 forecast statement, its attractive payments and processing market picture is predicated on a number of factors, including a demand for more M&A, quicker investment in competitive strengths, younger consumer preferences, improved investor optimism, and lessened regulatory scrutiny.

Ken Griffin’s Citadel Investment Group was the largest stakeholder in the firm among the funds in Insider Monkey’s database. It owns 4.12 million shares worth $2.03 billion as of Q3.

Montaka Global Investments stated the following regarding Mastercard Incorporated (NYSE:MA) in its Q3 2024 investor letter:

“Montaka owns several duopolists in the financial services industry, including Visa and Mastercard Incorporated (NYSE:MA) in payments; and S&P Global in credit ratings and financial data services. These businesses have competitively protected and reliably growing core businesses. But they also have newer, high-probability adjacent opportunities. The market, however, is underappreciating this powerful combination, in our view.

For Visa and Mastercard, their core businesses in global payment processing are being complemented by significant growth in two areas: New processing opportunities in peer-to-peer, business-to-business, business-to-consumer, and government-to-consumer payments; and Value-added services, including risk, fraud-detection, issuance, acceptance, and open banking.”

Overall, MA ranks 2nd on our list of the Best Financial Stocks To Buy According to Hedge Funds. While we acknowledge the potential for MA to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article is originally published at Insider Monkey.