If you've been following bank stocks lately, you've seen their stock prices trend lower along with Treasury yields as hopes of Trump's agenda passing this year fades. Whether we agree with the market's assessment of future conditions or not, we have to expect pullbacks and possibly corrections to the Trump bank rally.
As a result, focusing on the fundamentals such as economic growth, loan growth, and the Fed are just a few of the factors that will be imperative for investors to consider before going long financials.
This is an update to my prior article in March of these three banks before the Q1 earnings releases.
In this analysis, we'll be focusing on comparing P/E and Forward P/E ratios for our three banks.
In full disclosure, this article is not a comprehensive analysis of Bank of America or bank stocks. I am not a financial advisor, and we will only be analyzing a few of the many fundamental and economic factors that go into driving the stock price and profitability of BAC. Before making any investment decision, please contact your financial advisor. And of course, any analysis of past performance does not guarantee future results.
P/E Ratio Analysis: (price versus historical earnings)
Below is the P/E ratio growth percentages over the past year with BofA surging the most out of our three banks. However, P/Es have corrected substantially from their highs with BofA taking the brunt of the P/E correction.
The large correction in P/E for BofA makes sense given it had the largest price move over the same period or 54%.
YTD P/E ratios have fallen back to Earth as Treasury yields have retraced and growth expectations have waned.
The fall in yields comes despite the market seeing a very high probability of a rate hike from the Fed in June.
YTD percentage change in P/Es:
So far this year, both JPMorgan and BofA have had their P/Es fall by roughly 13%.
To put these numbers into perspective, as recently as March 1st, and prior to the Fed hike, BofA's P/E was over 17 as illustrated in the chart below.
The YTD percentage change in bank stock prices shows a less dramatic fall given the pullbacks in P/E ratios. In fairness, the prices are off quite substantially from their highs in March.
However, if you had invested in our three banks at the start of this year, your investment would be roughly flat for Bank of America and negative for JPMorgan and Wells Fargo.
When comparing the YTD price retracements to the pullbacks in P/E ratios for our three banks, the market may be indicating that the "E" is correcting more than the "P".
The quarter-to-quarter differences in earnings performance results are becoming less dramatic as banks have finally emerged from the doldrums of the financial crisis. In other words, we're no longer comparing the current quarter or year to a disastrous prior quarter or prior year. And that's a good sign for the economy.
Forward P/E Ratio Analysis: (Price versus expected future earnings)
The forward P/E for BofA is now in line with JPMorgan and Wells Fargo perhaps indicating the market has finally begun to adjust future growth expectations lower and also may indicate the frothy bank surge might give way to a more healthy and steady long-term upward trend.
A final risk management note:
More articles to follow analyzing Bank of America, financials, the Fed, and Treasury yields in the coming days and weeks.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.