Despite some significant bouts of volatility over the last year, the broader market has enjoyed a strong rally over that stretch. As of this writing, the S&P 500 (^GSPC -0.22%) has delivered a total return of 10.5% over the last 12 months. Indications that inflation might be moderating and hopes that interest rates will come down have played a big role in the gains.
Even more than businesses in other sectors, the outlook for financial companies hinges heavily on macroeconomic conditions and the Federal Reserve's approach to interest rate policy.
With that in mind, read on to see why two Fool.com contributing analysts identified these discounted stocks as top ways to play different potential outcomes on the interest rate front.
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PayPal's comeback is worth betting on
Keith Noonan (PayPal): Despite some solid gains for the broader financials sector across 2025's trading, PayPal (PYPL 2.17%) stock is down roughly 17% year to date. Similarly striking, the company's share price is also down roughly 77% from the lifetime high it hit in 2021 amid pandemic-driven demand and favorable catalysts for financial stocks connected to the low-interest rate environment.
While more competitors have moved into the payments and financial services space, PayPal still occupies a strong position in the industry. And while there have been a significant number of fast-growing upstarts in the space, few come close to matching PayPal's financial foundations and track record of dependable operational results.
Admittedly, PayPal's total revenue increased just 1% year over year to $7.8 billion in this year's first quarter. Meanwhile, total payment volume conducted across its platforms rose 3% annually to $417.2 billion.
On the other hand, the company has continued to do an impressive job with cost-reduction initiatives. Non-GAAP (generally accepted accounting principles) earnings per share for the period actually increased 23% year over year to hit $1.33. The company also closed the quarter out with $15.8 billion in cash against $12.6 billion in debt, even after returning $1.5 billion to shareholders through stock buybacks in the quarter.
Despite some promising signs that its growth and turnaround initiatives in key business areas are moving in the right direction, PayPal stock is still trading at just 13.5 times this year's expected earnings. With a feasible path for the Fed to deliver at least one interest rate cut later this year, the company could soon be seeing a more favorable operating and valuation backdrop. Looking further out, there seems to be a good chance that President Donald Trump will move to replace current Fed Chairman Jerome Powell in 2026 with a new leader who is more amenable to lowering rates.
With PayPal stock down big this year despite solid business foundations and encouraging performance on the margins front, the stock looks like a worthwhile play right now for investors seeking attractively valued stocks in the financials sector.
A stock to reduce the risk in a portfolio
Lee Samaha (Prudential Financial): This might get a bit esoteric, but bear with me! It's no secret that Elon Musk and President Trump have had a public spat over Trump's congressional spending bill, with Musk's primary concern being the implied increase in the national debt burden. As the chart demonstrates, Musk has a point about being concerned about debt.
Data by YCharts.
I have no wish to enter that debate here; suffice it to note that if the U.S. and its debt-to-GDP ratio are heading higher, then the U.S. may have to pay higher yields on its borrowing.
In this scenario, long-term interest rates will likely be higher than the market thinks in the future, and provided there isn't another debt meltdown, that creates a favorable environment for life insurance companies like Prudential Financial (PRU 0.18%), a stock which is still down 19% from its lifetime high. While higher rates will lower the value of its current bonds (insurers match liabilities to assets), they will also increase the discount rate on its liabilities. Meanwhile, higher rates mean Prudential can buy bonds at higher yields in the future.
It all adds up to make Prudential Financial a useful way to buy some insurance (hopeless pun intended) for a portfolio, and the stock's current 5.1% dividend yield doesn't hurt either.
