Bank of America Stock Has An 83% Upside To Its Pre-Inflation Shock

Bank of America stock (NYSE: BAC) currently trades at $27 per share, around 45% below (83% upside) its level of $49 on February 8, 2022 (pre-inflation shock high), and seems undervalued. Bank of America saw its stock trading at around $31 at the end of June 2022, just before the Fed started increasing rates, and is trading 13% below that level.  In comparison, the S&P 500 gained about 16% during this period. Further, the stock price has suffered in 2023, due to tough macroeconomic conditions. This was despite strong growth in the net interest income driven by the Fed rate hikes, leading to an increase in the Bank of America revenues.

Over the last few years, Bank of America’s stock has struggled as compared to the broader index. BAC stock has seen a decline of 10% from levels of $30 in early January 2021 to around $27 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the decrease in BAC stock has been far from consistent. Returns for the stock were 47% in 2021, -26% in 2022, and -18% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating an underperformance for the ticker in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financial sector including V, JPM, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BAC face a similar situation as it did in 2022 and 2023 and lose value over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level means that BAC stock will have to gain around 83% from the current levels. However, we do not expect that to materialize any time soon, and estimate Bank of America’s valuation to be around $35 per share (up 30%). This is because the tough macroeconomic scenario has negatively impacted investor confidence, and raised concerns about a potential slowdown.

Our detailed analysis of Bank of America’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline 
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains on the cards.

In contrast, here’s how BAC stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

BAC and S&P 500 Performance During 2007-08 Crisis

Bank of America stock declined from nearly $51 in September 2007 (pre-crisis peak) to below $4 in March 2009 (as the markets bottomed out), implying BAC stock lost almost 92% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $15 in early 2010, rising 281% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

BAC Fundamentals Over Recent Years

Bank of America revenues marginally decreased from $91.2 billion in 2019 to $85.5 billion in 2020 due to lower net interest income (NII). While the net interest income continued to suffer in 2021, the top line still increased by 4% due to growth in market driven revenues. Further, the trend continued in 2022 (revenues up 7% y-o-y), as the NII improved due to interest rate hikes.

Similarly, earnings increased from $2.77 in 2019 to $3.21 in 2022.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Bank of America (BAC) stock has the potential for strong gains once fears of a potential recession are allayed.

[1] Month-to-date and year-to-date as of 10/12/2023
[2] Cumulative total returns since the end of 2016