Shares of Paychex, Inc. (NASDAQ:PAYX) spiked last week, after the company reported upbeat third-quarter revenue and earnings.

The stock rally was surprising, especially since the company indicated limited scope for improvement in both employment and interest rates, according to BofA Securities.

Automatic Data Processing Inc’s (NASDAQ:ADP) earnings call is scheduled for April 26.

The Rating Changes: Analyst Jason Kupferberg downgraded the ratings for both Paychex and Automatic Data Processing from Neutral to Underperform, while maintaining a Buy rating on Mastercard Inc (NYSE:MA), Block Inc (NYSE:SQ) and Visa Inc (NYSE:V).

The Payments Sector Thesis: Both Paychex and Automatic Data Processing “tend to underperform the S&P 500 during the initial phase of a rising unemployment cycle,” Kupferberg said in the downgrade note.

Check out other analyst stock ratings.

“BofA Global Research’s Economics team forecasts unemployment starting to rise in 3Q23 and peaking in 2Q24 and also forecasts just one more 25bps rate hike before cuts start in 1Q24,” the analyst added.

Shares of Paychex and Automatic Data Processing could become less appealing to investors as the macro tailwinds of employment and rates ease and, “in some cases, turn into headwinds,” he added.

Mastercard, Block and Visa are “our favorite large-cap Payments stocks,” Kupferberg stated. “We continue to see the networks as particularly durable businesses in the payments landscape, with EPS protection in almost any macro scenario,” he added.

PAYX, ADP Price Action: Shares of Paychex had declined by 2.96% to $111.20, while Automatic Data Processing’s stock had tumbled 3.07% to $215.80 at the time of publication Monday.

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