For the past two years, I’ve warned against buying shares of Bank of America (NYSE:BAC). The logic was very simple. The externals on BAC stock were negative: deteriorating economic outlook, escalating global trade tensions, falling yields, secular technology risks, and a flattening yield curve.
Bank of America’s internals weren’t great either: sluggish revenue and profit growth, and a relatively full valuation. I reasoned, then, that poor externals plus poor internals would equal a sideways BAC.
Indeed, over the past two years, Bank of America stock has traded largely sideways. From late October 2017 to early October 2019, BAC rose just 2%, versus a 15% gain for the S&P 500 over that same stretch.
But, in October 2019, BAC stock has staged a huge comeback, rising 13% to the S&P 500’s 4% gain. What has propelled the huge rebound in Bank of America stock?
Everything. Long story short, everything has changed, with both the externals and internals significantly improving over the past month. As those externals and internals have improved, BAC stock has turned into a winner.
Will this winning continue? For the foreseeable future, yes. At present, it looks like the fundamentals supporting Bank of America will continue to improve for the next few months to quarters, and as they do, BAC stock will likely continue to grind higher.
How Bank of America Stock Became a Winner
In October 2019, Bank of America stock went from loser to winner because of two things.
First, the economic externals improved dramatically. Namely, U.S.-China trade tensions cooled, and as they cooled, the global economic outlook improved, yields moved higher, and the yield curve normalized.
This is very important for Bank of America, because as goes the U.S. economy, so goes U.S. banking activity, and so goes Bank of America’s revenues and profits. Further, the higher yields go and the more the yield curve widens, the more money Bank of America can make from its all-important loan business.
Second, Bank of America’s internals simultaneously improved in October. The bank reported strong third-quarter numbers recently. Those strong numbers underscored that even amid what were uneasy trade conditions last quarter, the bank’s consumer banking and wealth management businesses remained healthy.
Now, with those uneasy trade conditions improving, it stands to reason that Bank of America’s overall operations will also improve from here.
The combination of these two catalysts has breathed life back into BAC stock over the past month. Now, the big question is whether or not shares will stay in rally mode.
Why Shares Will Keep Rising
Bank of America stock should stay in rally mode because the fundamentals supporting the stock should remain favorable for the foreseeable future.
There are two big things here. First, trade tensions between the U.S. and China are cooling, and while they have “cooled” several times before, this recent wave of cooling seems more permanent than previous waves, given that both sides have agreed to do a series of what amounts to “mini” trade deals.
As these trade tensions cool going forward, global corporate confidence (which has been killed by escalating geopolitical uncertainty) will rebound. Rebounding global corporate confidence will lead to rebounding global capex and that will provide firepower for the global economy to get back into growth mode over the next few quarters.
Second, due to the U.S.-China trade war fall-out, central banks globally have adopted very accommodating fiscal policies over the past year. The result is that, for the first time since 2010, central banks are pumping significant amounts of fiscal stimulus into the global economy.
According to the Hutchins Fiscal Impact Measure, calendar 2019 is expected to be the first full year with four quarters of supportive fiscal policy since calendar 2010. This unusually large volume of fiscal stimulus should provide healthy global economic tailwinds in 2020.
Big picture – thanks to cooling trade tensions and supportive central bank policy, the global economy will likely rebound over the next few quarters. As it does, banking activity will pick up, yields will move higher, and the yield curve will normalize. For Bank of America, those developments mean more revenues, higher margins, and more profits.
For Bank of America stock, that means the current rally should persist for the foreseeable future, especially considering BAC stock trades at a rather pedestrian 11-times forward earnings, versus a financial sector-average 12-times forward multiple.
Bottom Line on BAC Stock
I’ve been bearish on BAC stock for the past two years. But, I think it’s time to take off the bear hat. The fundamentals here are finally improving in a meaningful and sustainable way, and as the fundamentals continue to improve over the next few quarters, BAC should breakout out of its two-year trading range and head to new highs.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
