Bank of America Corp (NYSE:BAC) reported blowout earnings 2 weeks ago. Now, BAC stock is trading at its highest level since the Great Recession.
The majority of BofA’s run to decade highs has happened since Donald J. Trump won the Presidential election. Since then, BAC stock is up some 60% on the hopes of higher interest rates and less regulation.
But I think this most recent leg higher is the beginning of the end of the rally for BofA stock. The harsh reality is that interest rates will remain lower for longer, thanks to automated technology threatening huge swaths of the labor market.
Without higher interest rates, BofA’s net interest income won’t grow at the rate it has been growing. Without robust growth in net interest income, BofA stock will fall back.
It’s only a matter of time.
Bank of America Theme: Lower for Longer
BofA stock now trades at more than 1.1-times book value.
At a 10% premium-to-book value, BAC stock is trading at its richest valuation since before the Great Recession. Clearly, BofA stock is priced with optimistic top- and bottom-line growth expectations. Those optimistic top- and bottom-line growth expectations are fueled primarily by expectations for robust growth in net interest income.
For example, take last quarter: Total revenues were up $806 million. The breakdown was a $922 million increase in net interest income and a $116 million decrease in non-interest income.
Thus, it’s clear to see that in order for BofA to successfully grow its top and bottom lines, the bank needs net interest income to continue to trend up. In order for that to happen, rates need to go up. Granted, loan and deposit growth will help some, but the big driver here is higher rates. Management said on the third-quarter conference call that a 100 basis-point increase in interest rates would boost net interest income by $3.2 billion over the next 12 months.
All in, then, BAC stock is a narrative based almost entirely on higher interest rates fueling robust profit growth.
But that narrative breaks down once you understand that rates aren’t going up big any time soon.
Technology is the enemy of higher rates. Beyond Amazon.com, Inc. (NASDAQ:AMZN) creating one of the most persistently promotional retail backdrops in recent memory (which is keeping consumer prices lower and fighting against inflation), the big threat to higher interest rates is automated technology.
Big swaths of the job market are at serious risk to job-replacing technologies. As automation and artificial intelligence technologies come to the forefront, jobs will be lost en mass.
Think of automated, self-driving cars and what happens to all of Uber’s drivers. Think of burger-flipping robots and what happens to all of the employees at McDonald’s Corporation (NYSE:MCD). And think of automated check-out registers and what happens to people who work at stores like Macy’s Inc (NYSE:M).
Bottom Line on BAC Stock
Automated technology is a far more powerful threat to the labor market than many of us want to accept, but it doesn’t take a rocket scientist to figure out that the current environment of multi-year low unemployment is temporary. Automation ensures this economy is on track for record high unemployment soon.
Lower for longer is here to stay. BAC stock is able to trade at a 10% premium-to-book value now because of optimistic expectations regarding rate hikes, but those rate hikes won’t materialize at a pace which satisfies investors. Consequently, this looks like the beginning of the end for BofA stock.
As of this writing, Luke Lango was long AMZN, NKE, and MCD.