Why are Moody's and S&P Global, two of the most renowned rating agencies, underperforming despite their quality reputation?

Moody's and S&P Global have underperformed the market and lagged behind major indexes over the past decade due to a combination of factors: 1. **Business Model and Revenue Structure**: Moody's and S&P Global's revenue is heavily dependent on the ratings business, which is sensitive to macroeconomic conditions and issuance levels. A slowdown in issuance amid macro uncertainty has affected their revenue growth. 2. **Market Volatility and Sensitivity to Macro Conditions**: The ratings business, which contributes significantly to Moody's revenue, is highly volatile and sensitive to macroeconomic factors. This volatility is reflected in their fluctuating growth rates and has led to concerns about the sustainability of their revenue streams. 3. **Investor Sentiment and Multiple Compression**: Despite their strong financial health, as indicated by a perfect Piotroski Score of 9, Moody's stock has experienced a decline in premarket trading following its earnings report. This is influenced by broader market conditions and concerns about market conditions and potential headwinds for revenue streams. Additionally, Moody's current price-to-earnings multiple exceeds both 3-year and 5-year averages, suggesting downside risk from multiple compression. 4. **Strategic Initiatives and Integration Challenges**: Moody's is building an Analytics segment to offset the volatility of the Ratings business, but this segment has a weaker moat and justifies a diluted valuation. The integration of new segments and the adaptation to changing market demands pose challenges to their performance. 5. **Sector-Wide Underperformance**: Moody's and S&P Global are not alone in underperforming; US bank stocks, including Moody's, have trailed the broader markets in June, reflecting broader sector challenges. 6. **Long-Term Performance Trends**: Over the past five years, Moody's has underperformed the S&P 500 by 30 points, and S&P Global has trailed by 54 points. This long-term trend of underperformance raises questions about the effectiveness of their business models and their ability to generate meaningful alpha for investors. In conclusion, Moody's and S&P Global's underperformance is a result of a combination of factors including their business model, market volatility, investor sentiment, strategic initiatives, sector-wide trends, and long-term performance trends. These factors have contributed to their relative underperformance despite their high-quality reputation and rigorous rating methodologies.