Shares of Bank of America (NYSE:BAC) are red hot. In 2019, BAC stock has risen more than 35% — including a 20%-plus rally over the past three months alone — and shares have broken out of a two-year sideways trading slump, all thanks to an improving global economic outlook.
That is, in late 2018, everyone was worried about a recession thanks to a Fed that was dead-set on hiking rates, and a U.S.-China trade war that refused to de-escalate. Consequently, consumer and capital spending trends were depressed. Yields plunged. The yield curve inverted at points. Economic activity slowed.
Because bank stocks rely on a strong economy to go higher, BAC stock plunged. From above $30 in August 2018, to nearly $20 by Christmas 2018.
In late 2019, however, the outlook is very different. Recession fears have largely abated, as the Fed has gone from hiking rates to cutting rates, and the U.S.-China trade war has gone from escalating to de-escalating. Consequently, consumer and capital spending trends are rebounding. Yields are rising. The yield curve has entirely normalized. Economic activity is picking back up.
That’s why Bank of America stock has soared back to above $30 in 2019.
Will the rally continue? Yes. The economic fundamentals surrounding BAC stock will continue to improve into 2020, and as they do, shares will continue to glide higher, supported by better-than-expected profit growth and meaningful multiple expansion.
Economic Fundamentals Will Continue to Improve
The core of the bull thesis on BAC stock is that global economic fundamentals will continue to improve heading into 2020.
When it comes to those global economic fundamentals, it’s all about two things: the Fed and the trade war. Right now, the outlook is for both of those factors to remain supportive in 2020.
On the Fed front, Fed Chair Jerome Powell has sounded a dovish tone throughout 2019. Many of the voting members of the Fed have too, with the common theme being that they want to support the current expansion.
These voting members saw what happened to the economy in 2018 when they hiked rates too quickly. They don’t want to make the same mistake in 2020. That’s why they are debating letting inflation go above their 2% target rate in the interim, thereby ensuring that the Fed doesn’t move too quickly in hiking rates in an improving economy.
On the trade war front, there are risks to presently easing U.S.-China trade relations (i.e. the Hong Kong protests). But, such risks are not large enough to derail what has been monumental trade progress over the past few months. At the end of the day, neither the U.S. nor China wants to escalate this trade war any further.
What happened is that both sides overestimated their economic power, and thought they could fare well in the face of a trade war. But, because globalism is a thing, that didn’t happen, and both economies slowed meaningfully.
Now, both countries are in a position where they want economic growth to come back. China is quickly losing its position as the world’s fastest-growing economy. China officials don’t like that, so they want China to get back to firing on all cylinders. At the same time, U.S. President Donald Trump is heading into an election year, and he knows that he needs a U.S. economy firing on all cylinders heading into that election in order to maximize his odds of winning.
Big picture — the global economy should improve into 2020, thanks to supportive central bank policy and easing trade tensions.
Bank of America Stock Will Stay Strong
So long as the global economy keeps improving, Bank of America stock will keep rallying.
Just look at all the good that happens at a bank when the economy is improving. Capital spending picks up, so banks make more money in their corporate accounts, especially on things like mergers and acquisitions.
Consumer spending picks up, too, so banks make more money in their consumer accounts. At the same time, yields move higher, so the bank makes more money on interest. The yield curve normalizes, too, so borrowing and lending conditions improve.
Basically, when the economy is improving, everything at a bank goes up.
This will all happen in 2020 for Bank of America stock. Easing trade tensions and a supportive Fed will push yields higher, normalize the yield curve, improve corporate sentiment, spark a rebound in capital spending, and supercharge consumer spending. All of those factors will push Bank of America’s revenue and profit numbers above expectations in 2020.
At the same time, Bank of America stock trades at less than 12-times forward earnings with a near 2% yield. Thus, this is still a value stock, implying that there’s ample room for multiple expansion in 2020 as global economic fundamentals and investor sentiment improve.
Bottom Line on BAC Stock
Bank of America stock has been stuck in neutral for the past two years as the global economy has meaningfully slowed. But, over the past few months, everything has changed. That is, the global economy appears to be in a huge transition from slowing to rebounding.
This transition should persist into 2020. That means that the global economy should bounce back next year. As it does, all bank stocks should move higher, Bank of America stock included.
As of this writing, Luke Lango was long BAC.