The S&P 500 (^GSPC +0.15%) index is trading at a Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio of 41, the second-highest valuation in its history behind only the peak of the dot-com internet bubble in the year 2000. The index crashed by 49% when that bubble eventually burst, and while I’m not predicting a similar decline this time around, the risks to the current bull market are clearly mounting.
The Federal Reserve recently hiked interest rates to tame the rising inflation rate, which is generally bad news for stocks. Moreover, the artificial intelligence (AI) stocks that led the S&P 500 higher over the last few years have run into some turbulence, as investors question the sustainability of the data center spending boom.
It’s entirely possible for those headwinds to spark a bear-market decline of 20% or more in the S&P 500. However, periods of heightened volatility tend to benefit one particular company: Interactive Brokers (IBKR +0.94%). Here’s why its stock could be a great buy right now.
Image source: Getty Images.
One of the world’s largest online brokerages
Interactive Brokers operates one of the world’s most popular online investing platforms, where its clients buy and sell stocks, options contracts, futures contracts, and even cryptocurrencies. It had a record 5.58 million client accounts at the conclusion of the third quarter (ended Sept. 30), which was up by a whopping 35% from the year-ago period. That growth rate actually accelerated from 34% in the second quarter.
Client equity — which represents the total value of all financial assets held in Interactive’s custody — also jumped by 27% to $964.7 billion. This number is important because Interactive earns volume-based commissions when clients buy and sell stocks or derivatives, so more equity means the platform has a bigger fee base.
In terms of transactions, Interactive processed 4.27 million daily average revenue trades (DARTS) during the third quarter, up 18%. But volume was a mixed bag; while clients were more active in the futures market compared to the year-ago period, they were less active in the stock and options markets. This is likely because the stock market traded in a relatively narrow range during the July to September period, with minimal volatility.
With that said, one metric suggests investors remained extremely bullish during the quarter. Interactive’s outstanding margin loan balances ballooned by 36% to $105.2 billion, so clients still felt comfortable borrowing money to buy stocks and other financial assets. The company earns a significant amount of interest on those loans, so this revenue source might take a hit if a stock market downturn forces clients to deleverage.
Ideal conditions for faster revenue growth
Interactive generated $1.91 billion in revenue during the third quarter, a 15% increase from the year-ago period. There were two main components to that number:
- $602 million in commission revenue, which grew by 12%.
- $1.15 billion in net interest income, up 19%. This represented the interest Interactive earned on margin loans, client cash balances, and its own corporate cash balance.
If stock market volatility ramps up, I would expect commission revenue growth to accelerate as investors buy dips and hedge their potential downside risk using options and other derivatives. But net interest income might also grow at a faster pace in the near future as interest rates rise.
The Consumer Price Index (CPI) measure of inflation increased at an annualized rate of 3.7% in September, well above the Federal Reserve’s 2% target. To make matters worse, it accelerated from 3.4% in August. The Fed already hiked interest rates once at its September meeting, but policymakers might feel compelled to execute further hikes to ensure inflation doesn’t get out of control (like it did in 2022).
Therefore, although margin loan balances typically decline during bear markets, Interactive can still earn more net interest income overall if rates continue to rise. That will be especially true if cash balances climb as investors exit stocks and move to the sidelines for a while.
IBKR Interactive Brokers Group
$83.69+$0.78 (+0.94%)
NASDAQ · As of 10:02 AM ET 10/21/26
Interactive stock looks attractive on a forward basis
Interactive generated earnings of $2.61 per share over the last four quarters, placing its stock at a price-to-earnings (P/E) ratio of 31.6. Therefore, it’s currently more expensive than both the S&P 500 and Nasdaq-100 indexes, which trade at P/E ratios of 23.5 and 30.2, respectively.
But Wall Street’s average estimate (provided by Yahoo! Finance) suggests Interactive could grow its earnings to $3.31 per share in 2027, placing its stock at a forward P/E of 24.9. That earnings estimate could even be revised higher if stock market volatility and higher interest rates persist over the next few quarters, so it’s possible the stock is cheaper than it currently appears at face value.
As a result, I think Interactive stock might be a great buy right now.
