State Street (NYSE: STT) is a financial services firm that reported Q2 2024 financial results on Jul. 16, 2024. Shares were up 7.45% after the release as the firm beat adjusted earnings per share estimates by 12 cents. Revenue also beat expectations by $45 million.

Even with the rise in share price post-earnings, the firm is still underperforming the market and its sector year to date. State Street is up 11.5%. The financial services sector, represented by The Financial Select Sector SPDR Fund (NYSEARCA: XLF), is up 16.5%.

Let’s examine the firm's operations, which are among the top 50 largest publicly traded companies in the capital markets industry worldwide. We’ll then examine the financial results to understand why the market reacted positively. Lastly, we will examine the outlook, including what Wall Street analysts expect going forward.

State Street: A Big Player in Custodial Services and Index Funds

State Streets' operations are divided into two business lines: Investment Servicing and Investment Management. The investment servicing segment works with institutional clients, including mutual funds, corporate and public retirement plans, and foundations and endowments. Its technologies allow clients to execute financial transactions, and the firm primarily acts as a custodian. Custodians provide for the safekeeping of financial assets. State Street provides a range of software to institutional clients. This software covers things like reporting, compliance, and portfolio analysis.

The firm’s Investment Management business provides investment products through its State Street Global Advisors division. The firm offers both passive and actively managed investment solutions. But, most of its assets under management (AUM) are in products that track market indexes, such as the S&P 500.

For example, State Street manages the largest S&P 500 exchange-traded fund (ETF), the SPDR S&P 500 ETF Trust (NYSEARCA: SPY), with $564 billion under management. Primary competitors in this area include BlackRock (NYSE: BLK) and Vanguard.

The firm breaks down revenue into two primary sources on its income statement. The first is fee revenue, which made up 79% of total revenue in 2023. It generates revenue from asset management fees and fees for other services it provides in both divisions mentioned above. The second is net interest income (NII), which accounted for 23% of total revenue in 2023. The firm generates this income from investing client deposits. An “other income” line contributed -2% to total revenue in 2023.

Record Assets Boost State Street's Stock Price

State Street posted an earnings surprise of 6%. This influenced the positive reaction of the market, despite adjusted EPS being down 1% from last year. The firm posted records in assets under custody/administration (AUC/A) and assets under management (AUM).

AUC/A accounts for assets in the custodial part of the business and came in at $44.3 trillion. This number grew 12% from the previous year. State Street won $291 billion in new assets and secured $2.4 trillion in assets yet to be installed.

AUM represents assets in the investment management part of the business and came in at $4.4 trillion. This number was nearly $100 billion higher than expected and grew 16% from the previous year. Market share gains in U.S. low-cost ETFs and Europe, Middle East, and Africa (EMEA) ETFs helped reach this record.

Another sign of strength for the firm was the announcement of a 10% increase in its next quarterly dividend to $0.76 per share. Using the current share price would give the firm a dividend yield of 3.6%. This puts the firm’s dividend yield significantly above the average of large-cap firms in the capital markets industry, which is 2.4%. It is also significantly above that of BlackRock.

Total revenue increased by 3%, driven by gains in NII of 6%, and fee revenue up by 2%. An increase of 11% in both management fee and foreign exchange trading fee revenue helped boost overall fee revenue.

Adding Context to State Street's Results and Examining Analyst Price Targets

It is impressive to see State Street's record asset levels, which were a large reason for the stock's rise. A concern going forward is that fee revenue from most other large sources, such as back-office services and software, declined. The rising market artificially helped rising assets and higher management fee revenues. This boosted the numbers without the firm doing anything. Company management has more control over service fees. So, seeing these numbers go down dampens the results.

The average price target sits at $85.16, implying almost no upside. However, Wells Fargo increased its price target after the release to $98, implying an upside of 16%.