Our $130 target price for State Street is derived from our discounted residual income model, which incorporates our three-year forward earnings projection, a seven-year fade period, and a steady-state terminal value at year ten. The key inputs to the model assume 10.3% cost of equity, including a risk-free rate of 4.5%, an equity risk premium of 3.5% and a beta of 1.65, and also incorporate a modified long-term ROTCE estimate of 20.0%. We assume a perpetual growth rate of about 2.0%.

Factors which could cause the company to exceed our target price include a pronounced increase in asset values, better-than-expected economic growth, better-than-expected pricing dynamics, and better-than-expected trading volumes.

Factors which could cause the company to fail to achieve our target price include a pronounced decline in asset values, weaker-than-expected trading volumes, regulatory developments, and unfavorable outcomes from outstanding litigation.