CME Group

CME reported solid second-quarter earnings as impressive market data revenue growth offset lower trading revenue. Net revenue increased 0.8% from last year to 1.7 billion, while earnings per share rose to $2.89 from $2.81 in the prior year.

Why it matters: At first glance, CME's results may not seem particularly attractive given low year-over-year revenue and earnings growth. However, the second quarter of 2025 makes for a difficult comparison as trading volume last year benefited from tariff-related volatility. CME generates around 80% of its revenue from trading fees, meaning that its performance can be volatile from quarter to quarter and is dependent on shifts in market activity. Case in point, trading volume fell to 29.8 million contracts per day from 30.2 million last year and a record-breaking 36.2 million last quarter. That said, CME's more stable market data business grew 20% to $238 million. Despite being a modest portion of total revenue, we value this growth highly given its recurring nature.

The bottom line: We will maintain our $285 fair value estimate for wide-moat CME, and we see the shares as undervalued. Like the other North American exchanges, CME's shares have sold off since the Commodity Futures Trading Commission approved cryptocurrency perpetual futures for trading in the US. In our view, the threat from perpetual futures is limited given their unsuitability for serious institutional risk management. We think that, along with its peers, CME has become oversold as a result. Additionally, there is potential upside to our fair value estimate if CME continues to see such strong market data revenue growth. The 17.7% growth rate CME delivered in the first half of 2026 was well above the 9% 5-year CAGR we assume in our model.

Coming up: While still too early to tell, prospects for high trading volume in the third quarter look strong. CME is a beneficiary of economic and geopolitical uncertainty, which has risen once again in recent weeks.

Structurally, because of their funding rate mechanisms, perpetual futures do not have stable carrying costs. This means that for a long-term position intended for risk management, a trader does not know how expensive their position will be until after the fact. This renders perpetual futures a poor replacement for CME's futures products, outside of short-term retail speculation.

While this is a minor component of CME's existing business, expanding its retail presence is a major focus of CME's long-term growth strategy. Broader approval of perpetual futures from the CFTC would add competition to initiatives like CME's expansion into prediction contracts. In that sense, perpetual futures represent more of an opportunity cost than a direct threat to CME's current business.

However, we have already taken a conservative view on the success of CME's push into retail markets. For example, our model sees CME receiving less than 1% of its revenue from prediction markets by 2030, limiting any potential impact from perpetual futures on our fair value estimate. In our view, the realistic risk from perpetuals is already fully priced in.

We are increasing our fair value estimate for CME to $285 from $265. The increase is entirely due a lower cost of capital in our model as we calibrate our cost of capital assumptions across our coverage. Our fair value estimate translates to about 21.67 times our 2026 projected earnings and we use a 6.7% weighted average cost of capital.

We project that CME's revenue will grow at an average annual rate of around 5% from a cyclically strong 2025 to 2030. While we expect CME's overall trading volume to grow at a relatively stable rate, we believe there will be some significant fluctuations in the trading volumes of futures tied to specific asset classes. We expect interest-rate futures volume to decrease in 2027, as CME has benefited from significant interest-rate uncertainty, driving unusually high trading volume since 2024.

Additionally, the firm's metal futures saw an explosive 28% increase in revenue in 2025, thanks to a major rally in precious metal prices. While we expect volume to remain elevated for full-year 2026, we project a period of normalization in 2027, with a meaningful decrease in volume.

We expect equity futures volumes to remain high, as volatile markets have driven strong trading in the complex. That said, we do expect volume to remain relatively flat, as market volatility normalizes. Lower equity futures volumes should be offset by higher average revenue per contract, as the company benefits from recent price increases and improved product mix. All in all, we expect CME's transactional revenue to increase at an average rate of just over 4.5% over the next five years, with the firm's metal futures lagging the firmwide average with a five-year CAGR of only 1.62%.

We do expect strong growth from the firm's nascent prediction markets business, with average daily volume reaching 8.5 million by 2030, more than 20% of total projected volume. That said, these contracts feature pricing well below the firmwide average, and we see this segment only contributing 0.20 percentage points of our projected 4.5% five-year transaction revenue CAGR.

We also project that CME will increase its data revenue in the high single digits per year over the next five years, particularly as the firm enjoys strong pricing power for its data products. The company should also see falling interest income on client collateral in 2027 and beyond, as client collateral requirements decrease due to lower volatility.

CME Group has achieved a wide moat rating as a result of its position as a leading venue for trading US futures contracts. More than 95% of US interest-rate futures trade on CME’s exchange, the company has exclusive licenses to issue futures contracts on the S&P 500, Russell 2000, and Nasdaq indexes, and it is the dominant venue for trading West Texas Intermediate oil futures. We see its strong competitive advantages allowing CME to earn excess returns on capital for the foreseeable future.

CME’s position in the US futures market has proved durable as attempts by NYSE Life and ELX to enter the US interest-rate futures market failed to gain traction despite having contracts similar to CME’s. This is because competition among futures exchanges is largely dependent on implicit trading costs and collateral efficiencies, not the transaction fees the exchanges charge themselves. For example, the minimum tick size for CME 10-year Treasury futures contracts is $15.625 per contract compared with transaction fees that range from $0.30 to $0.75. Even if another exchange charges less than CME, a 1-tick-size worse execution on even a fraction of contracts would wipe out any savings to the customer from lower transaction fees. This gives CME considerable pricing power and has allowed the firm to enjoy an operating margin that has historically been around 60%.

The ability to trade on an exchange efficiently is dependent on the amount of liquidity present on the exchange already. This creates powerful network effects as the number of traders that already utilize CME’s exchanges ensures that its contracts have good liquidity, increasing their value to other customers. A potential competitor would need to attract a critical mass of trading volume before it could offer its customers comparable execution to CME, a difficult prospect as its initial user base would need to be willing to accept higher trading costs during the startup process. This process would be even further complicated by CME’s model as a vertically integrated clearinghouse and the restrictiveness of futures contracts. Contracts purchased at CME’s exchanges cannot be closed at another exchange and vice-versa. This keeps CME’s liquidity pools captive to its exchanges and creates additional barriers to potential competitors.

The firm’s clearinghouse also benefits from network effects. If one of CME’s customer’s fails to settle a contract, the exchange will step in and close out the transaction after seizing the collateral of the defaulted counterparty. Any potential losses by the counterparty are covered by a waterfall structure in which CME first covers the losses up to a certain amount. After CME’s contributions reach their limit, any remaining shortfall is covered by a guaranty fund paid for by the clearinghouse members or through direct assessments on them. This substantially reduces the systemic risk for investors and helps attract additional trading volume to exchanges. However, like other clearinghouses, CME’s potential contribution to the risk pool is limited, with total potential payments capping out at only $250 million. The majority of the potential credit risk is split among the clearinghouse members themselves, with the guaranty fund and potential assessments adding up to just under $22 billion at the end of 2020. As a result, the risk mitigation provided to investors is tied to the number and size of the clearinghouse's members, not just the clearinghouse's financial strength. Additionally, it is more efficient for collateral purposes for clearinghouse members to participate in as few clearinghouses as possible. This discourages the introduction of new clearinghouses, as a new entrant provides little risk mitigation to its members until it can establish a user base. This adds additional challenges for a new exchange to enter the market using the same vertically integrated model as CME.

CME also benefits from intangible assets resulting from its 27% ownership stake in S&P Dow Jones Indexes. In addition to receiving revenue from each S&P 500 license, this ownership stake effectively ensures CME Group has an exclusive license to issue the S&P 500 E-mini and E-micro futures contracts. In addition, CME’s position in S&P futures likely contributed to the exchange’s ability to attract additional equity index futures license agreements for the Nasdaq and Russell 2000 indexes, which returned to CME Group in 2017. These two futures products are licensed from other exchanges but trade on the CME. It is much more efficient for customers to trade two different equity index futures on the same exchange, as this allows them to net out their positions when posting collateral. For example, if a trader opens a long S&P futures position and is short the Nasdaq futures contract on the CME, the exchange can record the offsetting contract positions and reduce the amount of collateral they need to post. Additionally, like other exchanges, CME has been able to increasingly monetize the trading data generated on its exchange. This data is proprietary and is highly valuable to investors. The firm has considerable pricing power for its data services as the lack of competition in many of its products means it is an exclusive source of data.

When looking at CME’s ability to generate excess economic returns from its moat, we focus on its adjusted returns on invested capital excluding acquisition-related intangibles. While not a regular acquirer, CME has considerable amounts of intangible assets on its balance sheet from its purchases of CBOT and Nymex in 2007 and 2008, respectively, and NEX in 2018. CME does not amortize the intangible assets it acquired from CBOT and Nymex, instead choosing to leave them on the balance sheet, inflating its invested capital. Despite this, we do not see a large pool of intangible assets from past acquisitions as impairing our belief that CME has established maintainable competitive advantages in its business model.

CME's move into prediction markets could provide a meaningful tailwind to growth if performance is better than expected.

CME has been able to drive trading volume growth by successfully introducing new futures contracts, like the Micro E-mini S&P 500 and SOFR futures. The successful launch of a new contract could provide upside to our revenue projections.

If volatile market conditions persist, we expect CME to be a direct beneficiary.

Unlike its peers, CME is still mostly a transactional business. A drop in market activity could lead to decrease in earnings.

CME is benefiting from unusually high volatility in multiple markets. A return to normal conditions will create headwinds for the firm.

The cash fixed-income and foreign-exchange trading businesses CME acquired during its purchase of NEX could continue to struggle.