The ASX bank stock Macquarie Group Ltd (ASX: MQG) is the best pick in the industry in my opinion.
The Macquarie share price may already have risen by 13% in 2024 to date, as shown on the chart below, but it has actually underperformed the other major ASX bank shares.
So far in 2024, we've seen the Commonwealth Bank of Australia (ASX: CBA) share price rise 16.5%, the ANZ Group Holdings Ltd (ASX: ANZ) share price go up 15.4%, the National Australia Bank Ltd (ASX: NAB) share price rise 22.2%, and the Westpac Banking Corp (ASX: WBC) share price jump 23.4%.
A period of underperformance won't necessarily lead to outperformance in the upcoming period for Macquarie shares, but I think there's one key reason why the ASX bank stock could rise stronger than the rest over the next 12 months (and beyond).
Incoming US interest rate cut(s)
There has been a lot more noise from US Federal Reserve officials that an interest rate cut could be coming sooner rather than later.
The US Federal Reserve Chair Jerome Powell said the central bank won't wait until inflation reaches 2% to cut interest rates.
Federal Reserve Governor Christopher Waller said on Wednesday, according to CNBC:
I believe current data are consistent with achieving a soft landing, and I will be looking for data over the next couple months to buttress this view.
So, while I don't believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.
An interest rate cut, or multiple cuts, would significantly benefit Macquarie's earnings due to potential positive impacts on at least two of its segments.
A reduction of the cost of debt could revitalise the American economy, and perhaps the global economy. As a global investment bank, one of the ASX bank stock's main divisions is Macquarie Capital. This could spur more deals for the investment bank to be involved with, including takeovers and initial public offerings (IPOs).
A lower interest rate could also boost the valuation of various assets and asset classes. Macquarie Asset Management (MAM) generates a lot of management fees based on the value of the assets it manages. If those assets go up in value, Macquarie's earnings can grow. At 31 March 2024, the business had A$938.3 billion of assets under management (AUM).
Having global operations can really pay off for Macquarie.
Why do interest rates matter to asset prices?
The legendary investor Warren Buffett once described the importance of interest rates as follows:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
Earnings forecast for the ASX bank stock
According to the forecasts on Commsec, Macquarie could generate earnings per share (EPS) of $10.58 in FY25 and $11.71 in FY26.
This would put the Macquarie share price at 20x FY25's estimated earnings and 18x FY26's estimated earnings. This puts the ASX bank stock at a cheaper forward earnings multiple than Commonwealth Bank of Australia (ASX: CBA), while having more earnings diversification and a stronger earnings growth outlook.
