Back in November 2017, the Bank of America (NYSE:BAC) stock price cleared $28 for the first time since the financial crisis. Twenty-two months later, Bank of America stock again sits below that level.
Fundamentally, it doesn’t seem like BAC stock should be stagnant. Earnings are growing. U.S. equities on the whole have risen, with the S&P 500 gaining 9% over that period. That combination usually results in upside for a banking stock — but it hasn’t in this case.
There are legitimate reasons why, as I detailed this summer. Interest rates have moved up from near-zero levels, but the Federal Reserve already cut rates once and may well again. That in turn pressures key net interest margin. Trading and investment banking revenue remains under pressure. And investors are worried about a potential recession.
Indeed, Bank of America itself has assigned a 30% probability of a 2020 recession. An economic downturn, combined with a likely return to near-zero rates, would send Bank of America earnings plunging.
The problem at the moment is that none of those problems seem likely to be fixed any time soon. Bank of America stock is cheap, and the BAC stock price did bounce off a 1x book value level in September. But to really break out, BAC needs more — and ahead of earnings this month, it’s hard to see where that comes from.
What Changes the Story for Bank of America Stock?
The problem with arguing that BAC stock is simply “too cheap” here is that the story isn’t exactly hidden. It’s the 16th most-valuable company listed on U.S. exchanges. It’s exhaustively covered by Wall Street and the media. Armed with all that information, the market for nearly two years now has essentially said, with rare exceptions, that BAC stock is worth between $25-$30 per share.
And so for the BAC stock price to rise, that information needs to change. BAC stock does look cheap at less than 10x forward earnings and just over 1x book value. But it’s been cheap for that entire stretch. Meanwhile, peers are being treated the same. BAC trades at a premium to Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS), and at moderate discounts to JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC).
So what changes? Third quarter earnings, released on Oct. 16, are one potential catalyst. But it’s worth noting that earnings typically don’t move financial stocks all that much. Indeed, options that expire on Friday, Oct. 18, price in a roughly 5% move over the next two weeks.
Bank earnings reports simply don’t create much movement. Indeed, both Bank of America and JPMorgan have delivered a steady diet of bottom-line beats over the past two years. They’ve done little, if anything, for either stock.
Bank earnings reports usually don’t have much in the way of surprises. Charge-off data is released monthly, interest rates are reasonably well-known and macroeconomic (and loan) activity is measured in myriad ways. Quite often, headline earnings “beats” are just a matter of changes in tax rates or accounting vagaries.
It’s rare that an earnings report can be a catalyst for a financial, and at the moment there’s not much reason to suggest Bank of America earnings this month will be any different.
External Factors Look Worse, If Anything
If it’s not earnings, then what is it that breaks BAC stock out of its range? It’s hard to tell. The factors keeping a lid on shares are all in place. If anything, they look potentially more negative.
Macro worries appear to be building as U.S. equities sell off. The obvious risk is that the fourth quarter of 2019 winds up looking a lot like Q4 2018. U.S. markets fell 14% over that stretch, and the BAC stock price declined 16%.
Interest rates are negative worldwide, and pressure remains on the Federal Reserve for further rate cuts domestically. That pressure will build if and when macroeconomic factors look more concerning.
That potential combination — a weak economy and near-zero rates — is what helped send BAC stock tumbling during the financial crisis. Even if a repeat won’t be nearly as devastating, the core worry is that a more moderate repeat will occur at some point.
And the only thing BAC can do in response is to keep executing, keep growing and wait for investors to believe the stock is cheap enough even with that risk. That’s happened from time to time — again, Bank of America stock bounced nicely after reaching the 1x book value level. But for almost two years now, all of those rallies have eventually (and often quickly) faded. Even ahead of earnings, it’s difficult to see how that changes.
As of this writing, Vince Martin has no positions in any securities mentioned.
