Morgan Stanley outlook for the US consumer finance earnings season: Defense remains the main focus, Trump's proposal to limit credit card interest adds uncertainty.

The latest financial reporting season has arrived for the U.S. financial sector, with Morgan Stanley releasing a research report outlook. Morgan Stanley believes that in the next 12 months, given the expected impact of inflation and labor market dynamics on credit performance and consumer confidence, maintaining a defensive positioning is still necessary. In the entire consumer finance industry, Morgan Stanley has noticed that target stock prices have steadily increased since the beginning of the year, but earnings expectations have remained basically unchanged. The bank also acknowledges that in this report, it has also exhibited similar behavior, despite target prices and expectations being relatively conservative. Morgan Stanley's basic expectation is that the stocks it covers will achieve long-term average returns by 2026, but there is a moderate downside asymmetric risk. It is worth noting that at the time of the report's release, last Friday, Trump proposed to require credit card issuers to limit credit card rates to below 10% for one year, expected to be implemented on January 20th. Due to the lack of more details and the significant uncertainty surrounding whether and how this proposal can be implemented, Morgan Stanley expects increased volatility in the financial sector in the short term. The bank believes that if this proposal is implemented, such a significant rate cut will fundamentally reshape the credit card industry, greatly reduce the profitability of card issuers, and limit consumers' access to credit. Currently, Morgan Stanley believes that this is a high-risk, low-probability event that may face significant legal challenges. Therefore, the bank has not changed its basic outlook for the sector, but emphasizes that the uncertainty across the entire industry has increased, which may put pressure on valuation multiples. In the fourth quarter of 2025, the U.S. consumer finance industry is at a crossroads. Despite persistent inflation and a cooling labor market, the U.S. economy remains resilient - with GDP growth exceeding expectations, but job growth slowing down at the end of the year. Nonfarm payrolls increased by only 50,000 in December, lower than expected and a decrease from previous months, but surprisingly, the unemployment rate fell from 4.6% in November to 4.4%. This "low hiring, low firing" environment, where companies retain employees but do not actively expand, may confirm concerns about weakening job market growth momentum, even though layoffs remain manageable. In this context, consumer spending growth in the U.S. appears to have slowed down towards the end of the year. Morgan Stanley's analysis of JPMorgan Chase consumer data shows that spending in December increased by 2.4% year-on-year, lower than the 3.7% in November, with non-essential spending growing faster than essential spending, but both with a slowdown in growth. Morgan Stanley notes a slight difference between non-essential and essential spending, highlighting a continuous dynamic: the gap between high-income and low-income households is widening. Affluent consumers benefit from stable employment and asset appreciation, maintaining resilience, while low-income households continue to face pressures from high inflation and slowing wage growth. Therefore, despite some unexpected variations, non-essential spending growth remains higher than essential spending. Although geopolitical news continues to emerge, its direct impact on consumer finance has been limited so far. The market continues to focus on domestic economic fundamentals, and Morgan Stanley expects that recent global developments will not substantially disrupt trends in the industry in the short term. Looking ahead, Morgan Stanley predicts that inflation and labor market conditions will remain focal points for investors and operators. While there is potential for unexpected developments (both positive and negative), the industry's underlying resilience should help cushion short-term fluctuations. In weighing these complex factors, Morgan Stanley consistently maintains selectivity and rigor. Full valuations, unbalanced credit trends, and execution risks within the rating range collectively form a more balanced and differentiated outlook. Based on these dynamics, Morgan Stanley has made the following ratings and target price adjustments for the following financial stocks: