Bank of America Stock Is Up 42% YTD, Where Is It Headed?

Bank of America’s stock (NYSE: BAC) has gained about 42% year-to-date, compared to the 25% rise in the S&P500 index over the same period. Bank of America’s peer Wells Fargo (NYSE: WFC) is up by an even stronger 54% YTD. Overall, at its current price of $46 per share, BAC is trading around the Trefis’ estimate for Bank of America’s valuation. 

Some of the stock’s recent gains come off the back of the U.S. election, which saw the election of Donald Trump to the U.S. presidency for a second term. Investors are betting that the Trump administration’s focus on deregulation could translate into a more lenient approach to bank oversight versus the Biden administration. This could help banks boost their revenues, via higher deal volumes, lending activity, and potentially lower compliance costs which could boost profitability. Trump has also been in favor of tax cuts and this could also help the bottom lines of banks like Bank of America. Republicans, who generally favor free markets, have won control of the Senate and are on track to win the House of Representatives as well, and this could also be seen as a positive for the banking sector at large.

The increase in BAC stock over the last 4-year period has been far from consistent, with annual returns being more volatile than the S&P 500. Returns for the stock were 50% in 2021, -24% in 2022, and 5% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it 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 around rate cuts and multiple wars, could BAC face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? Let’s take a look at the company’s recent performance and outlook to find out.

Bank of America outperformed the street expectations in the third quarter of FY 2024, with total revenues coming in at $25.3 billion roughly flat compared to last year as the company’s gains in trading revenues, asset management, and investment banking fees were offset by a decline in net interest income. In addition, net profits declined 12% year-over-year to $6.9 billion, on account of higher provisions for loan losses. Net interest income has been impacted by rising rates, which result in higher payments on deposits while potentially deterring borrowing and loan growth as financing becomes more expensive for clients. However, the company has seen stronger activity in its advisory and trading businesses. While the Fixed-income trading revenue rose 8% year-over-year during the last quarter, led by stronger currencies and interest rate-related activity, Equities trading jumped 18% on account of higher cash and derivative volumes. BofA’s wealth and investment management revenue also rose 8% year-over-year to $5.8 billion driven by rising market valuations and client flows.

Looking ahead, things could get better. The company’s net interest income could improve in Q4 driven in part by the Federal Reserve rate cuts which started in September. The sequential growth in NII during Q3 also indicates that a potential turnaround is taking hold. Additionally, lower interest rates and more political certainty post-election could spur investment banking activity, with increased debt and equity issuances with M&A-related activity also poised to increase.

[1] Returns as of 11/17/2024
[2] Cumulative total returns since the end of 2016

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