American Express

American Express reported solid second-quarter earnings as higher spending on its cards drove strong revenue growth. Net revenue increased 10% from last year to $19.6 billion while diluted earnings per share rose to $4.53 from $4.08. These results translate to a return on average equity of 36.4%.

The bottom line: In response to the release, American Express' shares are trading lower on July 24. We disagree with this response, as we think the market is focusing too much on American Express' unchanged earnings per share guidance and not enough on the underlying strength in the firm's business. Foreign exchange adjusted card member spending growth was the strongest it has been in three years, with billed business rising 9.5% to $455.8 billion. The strength was broad, US consumer spending growth accelerated again to 11% while commercial card spending momentum continues to recover, rising 5% from last year. On the other hand, total operating expenses did rise 12% from last year, more than we had expected. This was mostly driven by American Express' platinum card refresh and strong engagement with its service rewards, which drove card member service costs up 50% from last year.

Key stats: As we incorporate these results, we are increasing our fair value estimate for wide-moat-rated American Express to $335 per share from $319. Despite their poor performance in 2026, we think the shares are roughly fairly valued as we thought they were pricey heading into the start of the year. The increase in our fair value estimate comes from higher medium-term revenue growth projections, primarily from higher discount revenue, which we now see growing at an 8.3% CAGR over the next five years, up from 7.7% previously. This is partially offset by higher operating expenses. The luxury card space is highly competitive, and while there is operating leverage to American Express' business, we expect any potential margin expansion to be returned to customers in the form of more rewards.

Along with earnings, American Express increased its 2026 revenue growth guidance to 10% from between 9% and 10% previously. At the same time, it left its diluted earnings per share guidance of between $17.30 and $17.90 unchanged, which likely contributed materially to the market's negative response to earnings. We think the firm's guidance makes sense as our own projections for 2026 revenue and earnings per share are 10.3% and $17.60, respectively.

Despite the unchanged earnings per share guidance, the firm is on stronger footing than we had initially anticipated. Average spending per proprietary basic card member has been very strong in 2026, increasing 6.1% year over year in the second quarter to $6,759. This is well above the 2% to 3% rate the firm has seen over the last three years and above the 4.1% five-year CAGR used in our model. This is significant because rapid spending growth improves per-card economics over time. The reward model used by American Express' luxury cards features significant statement credits and card member services, which have fixed costs to American Express but low variable reward points. This means revenue scales more with spending volume than the bank's expenses do. In our view, accelerated spending growth justifies American Express' higher investment spending, and we are not seriously concerned by the higher operating cost growth implied by the firm's guidance change, as we think it will drive higher long-term earnings potential.

We are increasing our fair value estimate to $335 per share from $319, which translates to 19 times our projected 2026 earnings. The increase in our fair value estimate comes from higher medium-term revenue growth projections, primarily from higher discount revenue, which we now see growing at an 8.3% CAGR over the next five years, up from 7.7% previously. This was partially offset by higher operating expense projections, mostly from near-term card member service cost growth.

We expect loan growth to continue to decelerate from the breakneck pace seen over the last three years, but changes to the structure of American Express' card products as well as its high rate of cardholder growth have provided the bank's lending business with meaningful tailwinds. As a result, we expect American Express' loan growth to remain higher than the industry average for the foreseeable future, leading to a net interest income compound annual growth rate of 8.2% from 2025 to 2030.

We expect discount revenue to increase by 9.9% in 2026, a notable acceleration from the 6.3% rate seen last year. Weak commercial spending growth had been a headwind to the firm for nearly three years and was depressing discount revenue growth, offsetting some of the benefit from American Express' strong new card acquisition. That said, recent quarters have seen a revival in performance, with commercial spending growth now in the midsingle digits. We expect the company to generate high-single-digit discount revenue growth in 2027 and beyond, as we think the firm's shift toward a younger demographic will benefit its long-term spending volume growth trajectory. Additionally, we expect its card fee income to enjoy double-digit growth as the company continues to enjoy strong momentum in cardholder growth for its premium card business as well as the benefit of recent price hikes.

We project American Express’ membership reward expense to grow faster than discount revenue in the long term. The credit card market remains competitive, and cardmember reward programs have become more generous over time as companies seek to attract new cardholders. While the intensity of new reward offers from its competitors has slackened from its peak, the overall trend of increasing rewards remains in place, and American Express will need to follow in order to stay relevant. American Express' cost structure does benefit from fixed-cost leverage as spending on its cards increases; however, historically the benefit of this leverage has simply been returned to its cardholders in the form of more generous reward programs. As a result, we expect American Express' operating margin to be stable over time, ending 2030 at 20.8%, essentially flat from 2025.

In our view, American Express has a wide economic moat. We believe its differentiated operating model has allowed it to build durable competitive advantages that will lead to returns on equity well above its cost of capital for the foreseeable future. American Express operates as a closed-loop network for payments made by its cardholders. This means that American Express issues the credit card to the consumer, operates the payment network, and establishes a direct relationship with the merchant. This way, American Express can capture the full economic profit from a single credit card payment. As a result, it generates most of its revenue from discount revenue and card fees, with noninterest income making up roughly 75% of its revenue, unlike other credit card issuers that typically rely heavily on net interest income. Not being as reliant on interest income has helped American Express build a leading competitive position in credit cards for high-income individuals and small businesses, as both groups are less likely to maintain large outstanding balances on their cards. American Express' strength in these spaces has allowed it to remain effectively tied with Chase as the largest credit card issuer in the US by purchase volume.

American Express benefits from powerful network effects across its business. For a payment network to convince merchants to accept its payments, it needs a critical mass of users. But until a network has broad acceptance, it is difficult to attract users to its platform, making it difficult for new competitors to enter the market. Furthermore, despite their high transaction fees, credit card networks like American Express are deeply entrenched in US retail payments due to the lucrative reward structures attached to credit cards. Additionally, the costs of running a network are mostly fixed, so incremental revenue from additional purchase volume drops directly to the network's bottom line, further advantaging existing networks over potential entrants that lack scale. While smaller than Visa or Mastercard, American Express' network has historically been able to charge rates that match or even exceed its larger rivals due to the unusually affluent nature of its consumer cardholder base and its strong position in the commercial card market. American Express’ position as a successful closed-loop network gives it an advantage over other credit card issuers as the firm retains all of its transaction fee revenue.

Beyond the competitive benefit of American Express’ closed-loop payment network, the firm’s US consumer card business benefits from another layer of network effects thanks to the reward structure and affluent cardholder base of its premium fee-based cards. A key feature of American Express' consumer credit card segment is the high average spending rate on its cards and the bias toward travel and entertainment spending. In 2025, the average American Express cardholder spent more than $25,400 on their card, well above the average for a Visa or Mastercard cardholder.

This high-spending cardholder base is highly attractive to merchants, and American Express has been able to sign agreements where merchants help financially support reward programs on its cards, typically statement credits, in exchange for having these affluent consumers directed toward their businesses. As a result, American Express is able to offer reward programs worth more than the annual fee they are attached to, as much of the cost is defrayed by its merchant partners.

The firm also uses the heavy travel spending of its cardholders to create travel-focused reward platforms. For example, the company’s Fine Hotels & Resorts program offers a hotel booking service on American Express’ website and mobile app that gives the company’s premium cardholders discounts on hotel rooms and other special benefits, but the service only lists hotels that have agreed to be part of American Express’ platform. This creates a network effect, as the value for a hotel chain to join the platform is tied to the number of users, while the value provided to the users is tied to the number of hotels on the platform. The company has a similar program for flights and restaurants.

The result of this is that American Express enjoys a virtuous cycle in which upgraded reward packages attract more affluent consumers to American Express’ premium cards, making it easier for the firm to find more retailer partners for additional reward programs. This makes it difficult for new premium credit cards to enter American Express' market, since without a preexisting cardholder base that is attractive to merchants, they will need to compete with American Express' benefits programs without support.

American Express also has a strong presence in US commercial credit cards, with the company having a larger market share on the commercial side of the credit card industry than it does on the consumer side. American Express’ strength in the commercial space is driven by its success in becoming the card of choice for small and medium-size enterprises, which account for a significant majority of its commercial business, a success that is driven by its fully integrated operating model. On its primary fee-paying business cards, American Express offers its SME cardholders revolving debt with no preset spending limit. In practice, the major draw of American Express’ cards over its competitors’ offerings is that they have line sizes that are several times larger. In order to offer its cardholders these larger lines, the firm controls its risk by adjusting the exact line size proactively based on spending patterns and payment history of the cardholder as well as requiring monthly payment. This structure requires access to the data necessary to drive the firm’s credit models as well as a business strategy that is not reliant on net interest income. The company’s cards present a highly attractive value proposition to a small business since they are a payment method and a cheap line of credit with a large spending limit and also generate reward points, all in a single package. The consequence of this structure is that global commercial services generates very little in the way of interest; net interest income represented around 17% of revenue for the segment in 2025. Because American Express has its own network, it can compensate for the lack of interest payments by capturing more value from each dollar spent with its cards; competitors do not have this advantage.

American Express operates as a closed-loop network for the cards that it issues. This allows it to capture more of the economic profit of a single credit card payment than other credit card issuers.

American Express has found considerable success in growing its net interest income in recent years, enjoying better loan growth and lower credit costs than its peers.

American Express' effort to reposition its cards as lifestyle products for younger cardholders has been a success, and new card acquisition has risen significantly.

American Express operates with a narrower scope than many of its competitors, offering fewer deposit and lending products than other credit card issuers.

Despite much improved acceptance rates in the US, the company still trails other payment networks in international acceptance rates.

A weaker economy would be a major headwind on American Express' spending-centric business model, with the company's commercial cards already showing signs of deceleration.