3 Reasons Not to Get Too Excited About Bank of America Stock

All signs point to Banks of America stock staying rangebound

As goes the U.S. economy, so go U.S. banking stocks. Thus, it should be no surprise that as the U.S. economy has slowed since early 2018, shares of Bank of America (NYSE:BAC) have struggled. Specifically, from January 2018 to present, Bank of America stock hasn’t gone anywhere. That’s a near 20 month stretch of zero return.

3 Reasons Not to Get Too Excited About Bank of America Stock
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Unfortunately for BAC bulls, it looks like this range-bound trading in Bank of America stock will persist for the foreseeable future.

Why? Three big reasons. First, the fundamentals supporting BAC stock are a mixed bag and don’t give much credence to the bull thesis. Second, the potential optical drivers here lack visibility. Third, the technicals surrounding Bank of America stock imply that this stock is stuck in a well-defined trading range.

As such, investors shouldn’t get too excited about BAC stock here. It probably won’t collapse from current levels. But, it probably won’t break out to the upside anytime soon, either. Instead, shares will likely remain range bound for the next few quarters, meaning that there are better places to park your money for the time being.

The Fundamentals Are A Mixed Bag

The first big reason BAC stock will remain range bound for the foreseeable future is because the fundamentals underlying the stock are a mixed bag.

The U.S. economy is healthy today, and the consumer is strong. But, leading indicators from the OECD point to easing economic growth momentum in America, while business confidence continues to drop thanks to uncertainty surrounding the U.S.-China trade war.

Broadly, then, the U.S. economic backdrop for Bank of America is healthy, but not great or improving significantly.

The same is true on the yield side. Yields have risen from their historic lows in September, and the U.S. Treasury yield curve has partially un-inverted, with the 10-Year Treasury yield now above the Two-Year Treasury yield. But, yields still remain near historic lows, the yield curve is still very flat, and parts of that curve remain inverted. Thus, while yield conditions have improved from Bank of America, they remain broadly depressed.

Given this mixed bag of fundamentals, BAC stock seems reasonably to somewhat aggressively valued. The current price-to-book multiple of 1.1 is a decade-high, and that seems aggressive, but, the forward earnings multiple on BAC stock of 10 is roughly in-line with peer bank stock valuations, so that seems reasonable.

No matter which way you look at it, though, BAC stock does not seem undervalued here.

In sum, then, the fundamentals supporting Bank of America stock are mixed, and the valuation is reasonable. That’s not a great combo.

Optical Drivers Lack Visibility

The second big reason BAC stock will remain range bound is because the optical drivers here lack visibility.

There are really two big potential optical drivers for BAC stock – a trade resolution, and surging yields. The two will happen together. That is, if there is a trade resolution, yields will surge higher. On the flip, if yields move higher, it will probably be because U.S.-China trade tensions are easing.

Unfortunately, these two potential optical drivers lack visibility. That is, although U.S. President Donald Trump is saying a trade deal could happen soon, it probably won’t. China has no incentive to strike a trade deal before the 2020 U.S. Presidential Election. Their economy is rebounding on its own in the midst of this trade war, and they may as well take their chances that Trump doesn’t win in 2020.

If a trade deal doesn’t get struck, yields likely won’t surge higher. They could move higher as the trade war doesn’t escalate further, and the U.S. economy stabilizes. But, so long as the trade war hangs around, economic uncertainty will hang around, and that uncertainty will keep yields lower for longer.

The Technicals Imply Range Bound Trading

The third big reason BAC stock will remain range bound is because the technicals imply that it will.

Specifically, BAC stock has been stuck in a range between $22 and $32 over the past 20 months. This is not unusual for the stock. It has happened before, and when it does, it usually lasts a few quarters and doesn’t end until the stock meaningfully breaks above the upper band of the trading range.

Bank of America stock is presently showing no signs of wanting to do that. As such, the technicals say that BAC stock will remain stuck in this range for the foreseeable future.

Bottom Line on Bank of America Stock

If you’re buying BAC stock for the 2% yield and stability in an otherwise volatile market, I get it. But, if you’re looking to generate alpha and not just sit on dividends, then you should probably skip over Bank of America stock. This one isn’t heading higher anytime soon. Instead, it will remain range bound for the next few quarters.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/3-reasons-not-to-get-too-excited-about-bank-of-america-stock/.

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