Earnings season is about to kick into high gear, with the biggest American banks preparing to announce their quarterly revenues. Among this most anticipated of events revolves around Bank of America (NYSE:BAC). Potentially, BAC stock could make a big move as the company is scheduled to report earnings for 2020’s first quarter on April 15.
The company has lost $130 billion in market value since its most recent high, so there’s plenty of trepidation. Expectations are justifiably muted, but it’s possible for Bank of America to release numbers even worse than expected. With that in mind, does it make sense to buy BAC stock now?
A Shaky Economy
The banking sector, more than most swaths of the economy, depends on companies and entrepreneurs staying in business. Banks make money by lending money to these entities. And as the novel coronavirus has dampened people’s hopes and dreams of funding businesses, Bank of America has struggled to regain its footing.
Sure, the Federal Reserve will inject another $2.3 trillion “bazooka” into the economy. But that’s only in response to a horrendous scenario wherein American jobless claims have increased by more than 16 million in the past three weeks.
It’s going to be difficult for any bank to thrive in this environment. You’ve got former Federal Reserve Chair Janet Yellen estimating that the unemployment rate is 12% or 13% and the gross domestic product could decline by 30%.
House Speaker Nancy Pelosi is saying that “We could have a depression because so many people are out of work.” Bridgewater founder Ray Dalio is declaring that “This is bigger than what happened in 2008.” Analysts at JPMorgan predict that America’s gross domestic product will decline by 40% in the second quarter while April’s unemployment rate will surge to 20%.
So Many Issues
“These are sobering times, this is difficult, so banks bear the brunt of that.” That’s how Wells Fargo Securities senior bank analyst Mike Mayo summed up the challenges that financial institutions like Bank of America will face this earnings season.
Mayo predicts a 40% cut in Bank of America’s earnings estimates but does offer a tempered glimmer of hope, saying banks “come into this recession stronger than they’ve been… But we still think there’s issues.”
That’s certainly an understatement, but analysts are known for couching dire projections in euphemistic verbiage. The Fed’s liquidity bazooka is supposed to save financial institutions from ruin, but it’s the same Fed that slashed the federal funds rate to practically zero.
Banks rely on earning interest from the loans they make, but they can’t earn much if lending rates are suppressed. This, coupled with the likelihood that some businesses and individuals will default on their loans during the pandemic crisis, will compound Bank of America’s problems.
The other side of the coin is that lower interest rates will encourage borrowing. But then, it’s hard to imagine that business-lending activity will pick up during a massive health crisis. People might borrow money for necessities on their credit cards, but their ability to repay their debts could be jeopardized if unemployment rates increase.
The Takeaway on BAC Stock
Bank of America might beat earnings estimates if the results are only “somewhat awful” instead of “completely awful.” That’s not a compelling reason to own BAC stock as macroeconomic conditions suggest that there’s much more stress to come.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
