Fun fact: anyone who put £10,000 to work on 7 April 2025 with an index tracker fund, is now sitting on an impressive £13,244 – a 32.44% total return!

With the current tax year quickly coming to a close, investors will soon see their annual ISA allowance reset to £20,000. So the question now is, will the S&P 500 deliver more explosive gains in 2026/27?

What the experts are saying

Seeing a 30%+ return from the S&P 500 is pretty exceptional. And it’s a perfect example of the outsized gains investors can unlock when capitalising on stock market chaos.

Don’t forget April 2025 was when global US tariffs were unveiled, causing mass panic throughout the stock market, resulting in a sharp downward correction. But with the initial impact of tariffs later proving to be far less severe than anticipated, it didn’t take long for the S&P 500 to recover and climb even higher.

The question now is, how much higher can it climb in 2026?

Despite the uncertainty being created by the new conflict in the Middle East, the consensus among most institutional investors remains fairly upbeat, with Oppenheimer currently having the most optimistic target of 8,100 points by the end of 2026. Compared to where the index is trading today, that implies a 22.3% potential return, driven by AI productivity gains across multiple industries.

Obviously, this outcome’s far from guaranteed. And even if AI efficiency boosts materialise, today’s elevated valuations could already have these future profits priced in. In other words, investing in an S&P 500 index tracker may not live up to performance expectations.

But are there any interesting opportunities for stock pickers?

Opportunities outside tech

Outside the world of AI and technology, analysts have spotted several interesting opportunities, particularly in unpopular sectors like financials. And one potential screaming bargain right now might be PayPal (NASDAQ:PYPL).

The fintech giant has been sold off quite aggressively in recent years. And even in 2026, its downward trajectory has continued by another 23%. Yet, when looking at the underlying business, the valuation looks unusually cheap.

While growth has struggled, the company remains enormously cash-generative with underlying free cash flow landing at $6.4bn last year. And management’s subsequently executing aggressive share buybacks to take advantage.

Earlier this month, PayPal appointed Enrique Lores to take over as CEO, who has outlined a plan to get growth back on track. And if this strategy proves successful, this currently unloved fintech business could see a massive rally from today’s prices.

What could go wrong?

Competition within the fintech space is becoming increasingly fierce, with platforms such as Stripe and Shopify displacing PayPal as the default checkout options for online merchants.

Diversifying into the Buy Now Pay Later space opens the door to new growth opportunities, but just like with regular payments, this area too is filled with well-funded rivals that undercut the firm’s pricing power.

Put simply, PayPal might just be a melting ice cube – a strong business that’s slowly losing market share. But with new leadership being brought in to try and evolve the business, today’s massive discounted valuation might make this a risk worth considering.

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Being well-prepared, always

For starters, Buffett has tended to enter market volatility well-prepared.

As he once explained, “when forced to choose, I will not trade even a night’s sleep for the chance of extra profits”.

Many investors lose sleep when markets tumble, for example because they have bought stocks with money they cannot afford to lose (or, worse, have borrowed).

I think Buffett’s focus on not losing a night of sleep is far wiser.

Staying the course

At some points in his career, Warren Buffett has seemed to dump shares in a way that is hard to understand at the time. Early in the pandemic, for example, he dumped airline stocks.

From a long-term investor, that move was a bit hard to fathom (though Buffett had previously talked down the profit prospects of investing in airlines, so I was surprised he had even bought more before the pandemic).

Looking at the big picture, though, Warren Buffett hangs onto shares through the market cycle if he continues to believe in the underlying investment case.

For example, Berkshire Hathaway still owns stakes in American Express and Coca-Cola bought decades ago on Buffett’s watch.

Doing so while the wider market panics requires a cool hand. Warren Buffett demonstrates well why letting emotions trump rationality can be a costly move when markets go topsy turvy.

Hunting for great opportunities

One popular Warren Buffett quotation talks of being fearful when others are greedy and greedy when they are fearful.

The market overall right now still does not seem that fearful. The key US VIX volatility index is rising but has not yet reached what I regard as panic stations (though it is getting closer).

However, with geopolitical uncertainty growing and the tragic war in the Middle East rattling investors, there is already fear in some parts of the market – and I reckon that could spread fast.

So, following Warren Buffett’s advice, could now be the time to be greedy?

One opportunity I’m considering

I think it might be – and one share I have been weighing up is PayPal Holdings (NASDAQ: PYPL).

At first glance, this already looks cheap after an 82% price decline over the past five years.

Still, a large company with a customer franchise like PayPal’s does not fall that much for no reason.

For starters, there is the rise of fintech competitors that threaten to eat into PayPal’s business, from Wise to Stripe.

There are other risks here too, including an increasingly complex regulatory environment for international money transfers and last month’s shock announcement that the firm expects this year’s adjusted profit to fall, not grow.

Paypal’s stock slump means it is trading for just eight times earnings. But with earnings set to fall, I think that may not offer me enough margin of safety.

For now, I am on the sidelines. But if fear sweeps the market and makes PayPal stock even cheaper, it is on my watch list!

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So does that make buying US stocks a crazy idea? Well, the answer’s a little complicated…

Lots of uncertainty

Institutional analysts are forecasting ambitious corporate earnings growth for 2026.

This follows after both 2024 and 2025 outperformed expectations. And with substantial tax cuts scheduled for the first half of 2026 courtesy of President Trump’s One Big Beautiful Bill Act (OBBBA), consumer spending could prove to be far more resilient than expected, driving up profits even further.

Yet at the same time, investors are also seeing cracks in the US labour market. Unemployment, while still low by historical standards, is on the rise with full-time employment in decline.

Furthermore, while the Trump administration has secured new trade agreements with major partners including Europe and the UK, tariffs largely remain unresolved, with their subsequent inflationary impact still not fully incorporated in the prices of goods and services.

Put simply, it’s a complex situation with positive tailwinds being offset by negative headwinds. The difficultly is knowing which direction things are going to swing.

According to JP Morgan, the tailwinds currently have a higher chance of success, with a 65% probability that the US economy will grow in 2026, and within that even a 15% chance it will thrive. While that’s certainly encouraging, it also means there’s a 35% of a recession that could trigger a significant stock market sell-off given today’s lofty valuations.

There are always opportunities

While the S&P 500 as a whole is richly valued, there are nonetheless still reasonably-priced US stocks for investors to consider. And one small position from my portfolio that stands out is PayPal (NASDAQ:PYPL).

Over the last 12 months, the digital payments giant has seen its market-cap shrink by over 30%. The problem stems from a lack of revenue growth. A few years ago, the fintech was regularly expanding its sales and user base by double-digits. Yet looking at the outlook for 2026, a 5%-6% projected revenue increase didn’t exactly thrill the market.

However, while investors have been quick to punish PayPal for its lack of top-line expansion, it seems few have noticed the group’s improving profitability profile.

With management successfully expanding margins, earnings and free cash flow in its latest quarterly results surged by 24% and 19% respectively. And combining this with its falling share price has placed its price-to-earnings ratio at an unusually cheap 11.5.

Having said that, despite owning the popular mobile payment service, Venmo, for over a decade, the company’s consistently struggled to monetise the platform.

At the same time, the rise of other competing fintech solutions for consumers and businesses alike is making it increasingly harder to acquire new engaged users while simultaneously putting pressure on take rates.

Nevertheless, with good execution and continued profit expansion, PayPal could eventually find itself back in investors’ good books, especially if Venmo finally starts making a meaningful contribution. There’s obviously no guarantee, but at such a cheap valuation, it’s a risk I’m carefully considering. And it’s not the only S&P 500 stock on my radar right now.

The post Is it madness to buy S&P 500 stocks now? appeared first on The Motley Fool UK.

Over the last 10 years, PayPal’s free cash flow has been around $46bn. So my question is pretty simple: where’s all that money gone?

Where’s the money gone?

Spoiler alert: I’m not saying there’s anything untoward with PayPal or its accounting practices – to the best of my knowledge, there isn’t. But its cash does just seem to disappear.

The company hasn’t paid a dividend in the last 10 years, so all its cash has been retained in the business. But the firm’s book value has only increased by about $12bn. 

Share buybacks are another part of the story, but PayPal’s only reduced its share count by around 15% in the last decade. Based on the current market-cap, that’s around $10bn.

That still leaves about half of the company’s free cash flow unaccounted for. And this is a question anyone even thinking of buying the stock needs to find an answer to. 

Stock-based compensation

A big part of the answer is stock-based compensation. These are stock options PayPal gives its employees as part of their overall salary. Since they aren’t cash expenses, they don’t affect free cash flow. But the firm has to offset this with share buybacks to avoid diluting its existing shareholders – and that does use up cash.

PayPal’s stock-based compensation expenses since 2015 have has been around $11.2bn. So offsetting this with share repurchases accounts for around 25% of the firm’s free cash.

On the face of it, the stock looks cheap at a free cash flow multiple of around 13. But this is based on entirely ignoring stock-based compensation, which I think is entirely unjustifiable.

OpenAI

The latest news pushing the stock higher is the deal with OpenAI. ChatGPT’s moving into e-commerce and PayPal’s signed a deal to facilitate payments. If this is the future of e-commerce, there’s no doubt it’s where the company needs to be. And while it’s a key reason for long-term optimism, it raises yet more questions.

It isn’t clear, for example, whether the firm’s going to be the exclusive payment provider or just an option. And there isn’t yet confirmation of how the fee structure will work. 

If PayPal’s going to be the sole payment processor on ChatGPT with a promising cut of sales, the potential’s huge. But this hasn’t been confirmed, so investors can’t count on it. 

Sell?

I think PayPal’s share price surging is an opportunity. But I see it as a chance for investors who own the stock to consider getting out of it.

Stock-based compensation costs mean the share price isn’t as cheap as its free cash flow multiple makes it look. And the OpenAI deal is – so far – very light on details. 

Maybe this develops into something more promising. But for now, I think investors should seriously think about whether they can’t find better buying opportunities elsewhere.

The post 1 simple question for investors looking at buying PayPal shares appeared first on The Motley Fool UK.

Inflation details

The headline rate of inflation in the US has been rising since April, which has caused some investors to be concerned that interest rates might have to stay higher for longer. Normally, this isn’t a great sign for stocks. Companies often rely on debt and funding to function, so the interest costs associated with this would weigh on profits.

However, the 2.7% reading was the same as June. This potentially indicates that the period of higher inflation is coming to a close. Importantly, it also didn’t show any real impact from tariffs. Analysts were expecting any tariff impact to start to appear in the data series. The fact that it hasn’t is confidence-boosting for investors.

Based on this information, the probability of an interest rate cut at the September Federal Reserve meeting has risen. It looks like people are now expecting action from the central bank which, if realised, would be another positive sign for the stock market.

Targeting specific areas

It’s true that if the above plays out, the S&P 500 could have plenty of juice to move higher. Yet I think it’s wise to be active in stock selection right now, instead of just buying an index tracker. This is because specific sectors will benefit a lot more from interest rate cuts than others. This includes property, tech and utilities.

At a specific stock level, I can identify some good ones, including PayPal (NASDAQ:PYPL). The global digital payments platform facilitates online money transfers and payment processing for consumers and merchants. PayPal earns money primarily from transaction fees charged to merchants, as well as from value-added services like foreign exchange spreads and interest on customer balances.

Lower interest rates can benefit PayPal in several ways. First, cheaper borrowing costs can stimulate consumer spending and e-commerce activity. This should directly increase the transaction volumes flowing through its ecosystem.

Further, lower rates tend to ease credit conditions for merchants, which can boost small business activity and online sales, driving more payment processing revenue. It’s also important to remember that the business offers some credit-related products. Reduced funding costs improve margins and can spur demand as people can more easily afford credit.

The stock is up 6% over the past year. However, there are still risks involved. The online payment space is very competitive, with other companies realising the revenue potential from retail customers. PayPal needs to remain alert, otherwise, it could quickly get left behind.

Even with this, I think it’s well set to benefit from falling interest rates if inflation doesn’t rise. Therefore, investors could consider it for their portfolios.

The post Why the latest inflation print could push the S&P 500 even higher appeared first on The Motley Fool UK.

With minimal debt, that implies a free cash flow yield of almost 9%. That’s pretty high considering the business isn’t in decline – but there’s a catch when it comes to the valuation. 

Share buybacks

With no dividend, PayPal returns cash to shareholders via share buybacks. These work by reducing the outstanding share count, increasing the value of each of the remaining shares.

Since 2020, PayPal’s returned over $20bn via share repurchases. That’s around 30% of its current market value and the returns have been going up.

Despite this, the company’s share count has only fallen by about 13% over the last five years. That’s much less impressive and it raises an important question for investors. 

PayPal’s share count isn’t really going down much despite the firm using almost all the free cash it generates to buy back shares. So where’s the money going? 

Stock-based compensation

A big part of the answer is stock-based compensation. This is where PayPal issues shares to pay its staff part of their salaries in the firm’s stock, rather than cash. A lot of companies do this and I don’t think there’s anything intrinsically wrong with it. But it’s something that investors need to factor into their calculations.

Since 2020, PayPal’s issued around $6.5bn in stock to cover these expenses. And this has gone some way towards offsetting the cash the firm’s been using for share buybacks.

In 2024, the company spent almost $6bn on repurchasing shares, but just over 20% of this was offset by stock-based compensation. So the outstanding share count only fell by around 6%.

Expenses

Stock-based compensation doesn’t involve cash leaving the business directly. As a result, some investors tend to think it isn’t a real expense. I however, think this is a mistake. Issuing equity automatically reduces the value of share buybacks and this is a key mechanism companies can return cash to shareholders.

This is especially true when it comes to PayPal. Its 9% free cash flow yield’s attractive at first sight, but the firm can’t just use this to bring down its share count by that amount every year.

Before it can start bringing down its number of shares outstanding, it has to buy back the ones it issued. And it has to do that with cash, making it a very real expense for investors. 

Investment returns

I don’t think PayPal’s stock-based compensation is a reason to dismiss the stock out of hand immediately. And the company’s undergoing an interesting shift in terms of its priorities.

Focusing on margins over revenue growth could boost profits and integrating further into the online transaction process could boost its competitive position. These are potential positives.

For the time being though, I think there are better opportunities available. While the stock looks like a bargain at first sight, I don’t think it’s as attractive for me as it seems.

The post Should PayPal be on my list of shares to buy? appeared first on The Motley Fool UK.

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• PayPal’s Q1 earnings showed net revenues increasing by 2% at constant currency, and while this isn’t stellar growth, underlying PayPal branded volume growth was decent at 6%.
• The company is focusing on profitable, “durable” growth, rather than a higher proportion of low-margin processing volumes.
• To that end, underlying dollar margin growth (an important profit measure) grew at 8%, a slightly faster rate than the previous quarter.
• The company has cut costs in recent years as part of an efficiency drive, helping operating margins move higher, with margins increasing by a further 257 basis points to 20.7% in Q1. These improvements also highlight the scalable nature of payment processing.

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Here, I’m going to highlight two stocks that currently look cheap to me. I think they’re worth considering today.

A top digital payments stock

First up, we have PayPal (NASDAQ: PYPL). It’s one of the largest digital payments companies in the world.

Back in late January, this stock was trading near $90 (it’s listed in the US). Today however, it can be snapped up for less than $60.

I see a fair bit of value at current prices. As I write, the forward-looking price-to-earnings (P/E) ratio is around 11, which is not high at all for a payments company, especially one with a strong brand like PayPal.

Now, this company is facing quite a bit of competition today. Apple Pay, in particular, is one product that poses a threat to the business.

And that’s not the only risk here. If consumer spending slows down due to a recession or inflationary pressures, PayPal’s revenues could be impacted negatively.

In the long run though, I continue to see significant potential. Over the next decade, the online shopping industry is expected to get much bigger and this should support growth for the company, which recently introduced a new one-click checkout feature called ‘Fastlane’ to make payments quicker.

Another source of growth could be its subsidiary Venmo. This is a peer-to-peer payments app that has a large and growing user base in the US (nearly 100m users).

Given the long-term potential associated with the growth of the digital payments industry, I think the stock is worth a look today.

A play on the ageing population

Another stock that offers value in my view is Smith & Nephew (LSE: SN.). It’s a British healthcare company that specialises in joint replacement technology.

In early March, this stock – which is in the FTSE 100 – was trading near 1,200p. Now however, it can be bought for around 990p.

At that price, the forward-looking P/E ratio is around 12.3. That’s quite low for a medical technology company.

As for the dividend yield, it’s now about 3%. So, this stock offers two potential sources of return for investors.

Of course, there is tariff uncertainty here in the near term. So, the earnings forecast (the ‘E’) I used for the P/E ratio may not be accurate.

Another risk is competition from more powerful, US-based rivals such as Stryker and Johnson & Johnson. These companies could steal market share from Smith & Nephew if it fails to innovate.

Given that the global population is set to age dramatically over the next 10 years, however, I think there’s a lot of growth potential here. With the number of people aged 65 and older expected to increase by 36% between now and 2035 (to 1.2bn), the backdrop for this company remains favourable.

The post 2 stocks that have been crushed and now offer a ton of value appeared first on The Motley Fool UK.

Potential in payments

PayPal (NASDAQ:PYPL) is down 12% in the past month. Over a longer one-year period, it’s up 10%. The global digital payments platform generates revenue through multiple streams. Most of it comes from transaction fees, charged to merchants when payments are made. It also makes money from foreign exchange, premium services and credit provisions.

I’ve put the stock on my watchlist because I think it could do well this year. CEO Alex Chriss has recently focused on improving profitability by cutting operational costs and enhancing AI-driven automation. I like this push to make use of new tech, such as integrating AI-powered fraud detection and smart payment solutions. Ultimately, this should drive deeper engagement with customers and make them more comfortable to spend more using PayPal.

One risk is the increasingly competitive payments sector. It’s no longer enough to offer a good payment solution. Other companies are providing more add-ons and enhancements to woo clients. PayPal needs to focus on constantly innovating in order to not get left behind.

Backing active management

Another company on my list is T Rowe Price Group (NASDAQ:TROW). The stock has taken a 14% hit in the last month and is down 19% in the last year. Last week it hit fresh 52-week lows.

One reason for the drop is that investors have increasingly favoured low-cost index funds and exchange-traded funds over actively managed funds like T Rowe Price offers. After all, given the performance of the past couple of years from the S&P 500, some have decided to buy an index tracker.

However, I think this may change this year. The sharp drop in the S&P 500 shows that an index tracker might not be the best move during volatile times. Rather, this is the environment where active stock-picking can really outperform. Further, I expect the US Federal Reserve to continue cutting interest rates this year. With a lower base rate, more money should move out of cash and into the stock market. This could help to increase the assets under management for T Rowe Price.

Of course, I do have concerns with the stock. With a lot of uncertainty at the moment around tariffs, as well as ongoing conflicts in Europe and the Middle East, investors might continue to move money out of T Rowe Price and sit in cash. This would be negative for company revenues.

I have both growth shares on my watchlist right now. I’m going to monitor how the S&P 500 performs over the coming few weeks. If the sell-off shows signs of easing, I’d strongly consider buying these two for my portfolio.

The post As the S&P 500 enters correction territory, here are the growth stocks I’m eyeing appeared first on The Motley Fool UK.

Our monthly Fire Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of growth-focused Fire recommendations, to help Fools build out their portfolios.

• Its Q3 earnings showed revenues increasing by 6% at constant currency.
• While the growth rate decelerated from the previous quarter, the company is focusing on profitable, “durable” growth, rather than a higher proportion of low margin processing volumes.
• Its enterprise payments platform Braintree saw volume decline to 11% to 19%, but is “meaningfully contributing” to transaction margin dollar growth (an important profit measure) which grew 8% to $3.7bn.
• The company has cut costs in recent years as part of an efficiency drive, helping operating margins move higher (which were 18.8% in the quarter). But as the business scales, further drastic cost cutting shouldn’t be necessary to support margin growth.
• While the share has risen by 39% in the past 12 months, it’s currently trading at 17x trailing earnings, which still seems like a reasonable valuation for a growing, highly profitable business returning cash to its investors.

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