Our $55 target price for ALLY is derived from our discounted residual income model, which values an enterprise based on its discounted excess returns over its cost of equity. Our residual income model incorporates our 3-year forward earnings projection followed by a 7-year fade period to our normalized ROTCE estimate of 14%. The key inputs to our 12.4% cost of equity are a risk-free rate of 4.5%, ERP of 3.5%, and a beta of 2.25. We assume a 2.0% long-term growth rate.

Key risks to ALLY are macroeconomic risks, including a sharp slowdown globally, credit risk if there is an extended slowdown of the US economy. If economic growth is meaningfully below our expectations, volumes may be lower than we expect, and credit costs, specifically retail auto losses, may be higher. 

Risks to our target price include:  

A negative risk would be if the Fed is not able to achieve a "soft landing". Factors that could lead the company to exceed our target price include a faster-than-expected increase in interest rates, better-than-expected economic growth, and/or stronger loan growth.

If the impact on the company from any of these factors proves to be greater/less than we anticipate, we believe the stock will likely have difficulty achieving our target price or could outperform it.