CME - CME Group cut to Market Perform at Raymond James as rate futures outlook ebbs

Raymond James analyst Patrick O'Shaughnessy downgraded CME Group ( NASDAQ: CME ) to Market Perform from Outperform because the company's stock has highly correlated with its interest rate futures business over the past decade and the outlook for rate futures trading volume growth in 2023 has dimmed.

"Although CME ( CME ) currently trades below its 3- and 5-year average forward price/estimate of 28x and 27x, respectively, we think a lower P/E is appropriate if this rate  hike cycle is in fact going to be played out sooner rather than later," O'Shaughnessy wrote in a note to clients.

With the Federal Reserve front-loading its rate hike as it tries to push down inflation, "CME's volume growth may have already played out in 2022, and the story could potentially turn in 2023," he said.

With the Federal Reserve's policy interest rate currently standing at 2.25%-2.5%, a number of Fed officials have asserted that they want to front-load rate hikes in their determination to tame inflation. St. Louis Fed President James Bullard estimated the central bank may need to raise the federal funds target rate range to 3.75%-4.0% by the end of the year.

CME stock still has a number of positives, the analyst said,  including its strong operating margin, high barriers to entry and generous dividend policy.

O'Shaughnessy's Market Perform rating aligns with the Quant system's Hold rating and breaks from the average Wall Street rating of Buy.

SA contributor Leo Nelissen keeps a Buy rating on CME due to its high dividends and "fantastic" business model

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