Here’s a simple truth about bank stocks. As goes the economy, so go bank stocks. That is, when the global economy is firing on all cylinders, bank stocks roar higher. On the flip-side, when the economy slows, bank stocks falter.
This simple truth is the basis for a 2020 bull thesis on Bank of America (NYSE:BAC) stock. From early 2018 to mid-2019, Bank of America stock went nowhere because the economy went nowhere, as rising geopolitical and trade tensions stifled global expansion. In late 2019, however, Bank of America stock has broken out to new highs as trade tensions have eased and the global economic environment has improved.
These economic improvements will persist in 2020. The U.S. and China will put their trade war on hold, and central banks across the world will maintain supportive monetary policies. This combination will ultimately propel a meaningful economic rebound in 2020, defined by robust corporate and consumer spending trends, a healthy lending environment and strong banking activity.
Ultimately, this 2020 economic rebound has the potential to propel Bank of America stock above $40 for the first time since the 2007-2008 financial crisis.
Bank of America’s Fundamentals Are Improving
The bull thesis on Bank of America stock heading into 2020 is shockingly simple. In simple terms, it goes something like this: The economy is improving, so buy BAC stock.
From early 2018 to mid-2019, the global economy slowed meaningfully thanks to escalating U.S.-China trade tensions. Heading into 2020, though, everything is changing course. Both the U.S. and China have backed off on upping the ante in the trade war. Instead, both sides seem committed to trade war de-escalation, for different reasons. The U.S. administration doesn’t want to upset the global economic balance in an election year, while China’s administration doesn’t want its economy to keep sinking on trade headwinds.
Consequently, throughout 2020 into the U.S. presidential election, global trade tensions will ease. That will inject certainty back into the global economy, which will provide a lift to corporate and consumer confidence levels. As corporations and consumers get more confident, they will get more active, and spend more money. Big picture, then, the global economy appears optimally positioned for a big rebound in 2020.
At the same time, the Federal Reserve will likely remain on hold given that inflation remains stubbornly below 2%, so the short end of the curve will likely stay low. Meanwhile, the long end will move higher thanks to increasing economic activity. That creates a great situation for banks to make money by borrowing short and lending long.
All in all, the operating environment for banks will improve dramatically in 2020. As it does, Bank of America stock could make a run for $40.
Bank of America Stock Is Positioned to Run Above $40
Bank of America stock hasn’t been above the $40 level since before the financial crisis. But, in 2020, shares could finally eclipse that mark once again.
The numbers here are pretty simple. Bank of America projects to do about $2.80 in earnings per share this year, according to sell-side estimates. The financial sector has historically grown earnings at a fairly consistent single-digit rate over the past few years, excluding the impact of tax cuts. Over the next two years, profit growth rates should be better than average, given the huge fundamental improvements outlined earlier.
As such, Bank of America has a visible opportunity to grow profits at a high single-digit rate over the next few years. In this light, the consensus sell-side estimate calling for $3.30 in earnings per share by fiscal 2021 seems entirely doable.
Let’s assume that, by the end of 2020, the forward profit estimate does sit at $3.30 per share. Let’s also assume that, because the operating environment will be favorable, Bank of America stock trades at a financial sector long-term average forward price-to-earnings multiple of 13. That combination (13-times forward earnings on $3.30 in projected 2021 EPS) implies a 2020 price target for BAC stock of over $40.
That’s exactly where I think Bank of America stock will trend over the next 12 months.
Bottom Line on BAC Stock
Bank of America stock finally has its groove back thanks to easing U.S.-China trade tensions breathing life back into the global economy. Throughout most of 2020, trade tensions will continue to ease, and the global economy will continue to pick up steam. As both of those things happen, Bank of America stock will continue to march higher.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
