Arguably, no stock trading sector is more sensitive to the economic cycle than the banking sector. Banks, after all, are at the center of business activity making loans for capital projects or mortgages, and taking on more deposits as the economy grows. If the economy changes (for good or bad), banks are one of the first stocks to see the effects.
Given all the economic volatility of the past few years, it's gotten tougher to tell which way the economy is really going. The general consensus earlier this year was decidedly toward a definite downturn. But recently, one of the country's foremost bankers made a bold prediction. Speaking at the Economic Club of New York last week, Bank of America's (BAC -0.21%) Brian Moynihan said bluntly, "We won't have a recession."
Elaborating, he told the audience, "Our strategists are saying 'no recession,' very slow growth. That's a soft landing by definition."
Opinions on the economy are divided
While Moynihan's comments may not constitute a ringing endorsement for an economic recovery, they are about the most bullish remarks we've heard lately from a major financier. JPMorgan Chase's Jamie Dimon, for instance, recently said it would be a mistake to expect the resilience in the U.S. economy to remain for years.
Image source: Getty Images.
In addition, Federal Reserve Chair Jerome Powell was careful to say that a soft landing was not his baseline expectation after the recent interest-rate decision, but the Fed's own forecast indicates that it expects to GDP to remain positive, a sign that there won't be a recession, which is defined by some as two straight quarters of negative growth. The median GDP forecast now calls for 2.1% growth this year, 1.5% growth next year, and 1.8% in 2025 and beyond.
The latest personal consumption expenditures (PCE) report, which is the Fed's preferred inflation gauge, should also help further alleviate fears of higher rates and a recession, as core PCE fell to 3.9% year over year in August from 4.3% in July.
Moynihan added that his bank's "commercial customer credit quality is really strong." His optimism seems to reflect well on Bank of America's position, so it seems natural to ask: Is Bank of America stock a buy right now?
Get out your checkbook
We won't get an update on Bank of America's third quarter for a couple of more weeks, but there are some other data we can use to assess the company's latest performance.
At an industry conference on Sept. 20, CFO Alastair Borthwick said the company was still targeting $14.2 billion to $14.3 billion in net interest income for the third quarter, which would be even with the second-quarter result.
Borthwick also portrayed much of the business as strong, calling the consumer side "terrific," and noted that BofA had the lowest credit losses of any bank in 11 of the last 12 Fed stress tests, a credit to the bank's management and the group of customers it's assembled.
The company also raised its quarterly dividend by 9% in July, a sign of its confidence in the face of macro headwinds, and the bank now offers an attractive dividend yield at 3.5%.
Second-quarter results were strong, with earnings per share jumping 21% to $0.88, and the economy remained steady from the second to the third quarter. In fact, the company's decreasing forecast of a recession should help slow down growth in its loan loss reserves, which reached $1.1 billion in the second quarter. If it factors in that improved forecast, its delinquency models should improve, which will help lift profitability.
Finally, Bank of America stock looks well-priced, trading at a price-to-earnings ratio of just 7.9. As the following chart shows, that's cheaper than it's been at any point in the past decade, aside from a brief dip when the pandemic started.
The diminished earnings multiple implies that a recession is probably on the way, but if one doesn't materialize, Bank of America could be trading at a much higher multiple in a year.
If you agree with Moynihan's assessment that a recession is no longer a threat, the bank stock looks like an easy lay-up at the current price.
