At the end of 2019, shares of Bank of America (NYSE:BAC) broke out of a two year trading range on optimism regarding an economic recovery in 2020. So far in 2020, however, BAC stock has fallen flat as that planned economic recovery is put on hold by the coronavirus outbreak in China.
In the big picture, near-term choppiness in Bank of America stock is ephemeral. It will pass, and by the middle of 2020, this stock will likely be up around $40.
Why? Because the one major headwinds which has held shares back so far in 2020 — the coronavirus outbreak — won’t last. Within the next few months, the epidemic and its adverse economic impacts will fade. When they do, the global economic recovery will resume, perhaps with even more firepower than before thanks to more fiscal stimulus. Consumer economic activity will pick up, corporate economic activity will bounce back, yields will rise, and the yield curve will normalize.
As all that happens, Bank of America stock will rally because this is a stock tethered to economic strength.
The Recovery Will Resume
Heading into 2020, the global economy looked poised for a significant recovery, supported by tremendous fiscal stimulus in 2019 (the U.S. Federal Reserve poured more stimulus into the U.S. economy in 2019 than in any year since the Financial Crisis) and easing U.S.-China trade tensions.
That recovery has been put on pause in early 2020 thanks to the coronavirus outbreak in China. But it’s important to note that this slowdown is just temporary.
The coronavirus, though bigger than previous epidemics, is still just an epidemic. That is, it’s tragic and scary, but it’s also fleeting and ephemeral. Much like previous modern epidemics, it will rise, spread, peak, fall, and disappear, all likely within the span of a few months. As was the case with previous epidemics, when the coronavirus outbreak does disappear, the global economy will rebound sharply.
Indeed, there’s reason to believe that once coronavirus fears subside, the global economic recovery will actually have some extra juice. That’s because in order to support growth during this troubling time, the People’s Bank of China as well as many other central banks across Asia have injected more fiscal stimulus into their economies. At the same time, there has been an acceleration in the cooling of U.S.-China trade tensions.
Come mid-2020, the global economy will be equipped with a ton of fiscal stimulus and more geopolitical stability than we’ve seen in years.
That’s a recipe for success for the economy. And that’s great news for Bank of America, because as goes the economy, so goes Bank of America stock.
Bank of America Stock Will Run Towards $40
Right now, Bank of America is operating in a world with slowing economic expansion, exceptionally low yields, and an inverted yield curve. By mid-2020, all of that will change. The economy will be gaining momentum, thanks to easing trade tensions and tons of fiscal stimulus. Today’s low yields will move higher alongside stronger growth. The yield curve will normalize as growth improves but the Fed remains on the sidelines.
Thus, over the next few months, things will get better — not worse — for Bank of America. As things do get better, the stock will rally towards $40.
Here’s the math. The bank will likely sustain 1% to 3% revenue growth over the next few years, consistent with steady U.S. GDP growth. Margins will expand somewhat thanks to marginally higher yields and some cost-saving initiatives. Profits will move higher at a high single-digit to low double-digit pace.
Assuming so, then Bank of America will likely net somewhere around $3.50 in earnings per share by fiscal 2021. This stock, and all bank stocks for that matter, tend to trade around 11.4-times forward earnings.
Based on that sector-average forward multiple, $3.50 in 2021 projected profits per share implies a 2020 price target for the stock of nearly $40.
Bottom Line on BAC Stock
Over the next few months, things will get better for Bank of America. I’m talking stronger economic expansion, higher yields, and a more normal yield curve. Against that backdrop, all bank stocks — BAC stock included — will work.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
