After a three standard deviation move in large-cap bank stocks, it seems logical to think about heading to the sidelines, says analyst Betsy Graseck. But should the names pull back, she recommends adding to positions as the bull case still outweighs the bear case next year.
Using base case 2018 estimates and a target P/E of 12x implies 14% upside for Morgan's eight Overweight-rated stocks. The bull case on 2018 estimates with the same target P/E means upside of 41%.
Top picks are Citigroup (NYSE:C), Synchrony Financial (NYSE:SYF) on stronger capital returns; Bank of America (NYSE:BAC) on higher rates and lower expenses; Goldman Sachs (NYSE:GS) on rising market volatility and improving VAR productivity; JPMorgan and Wells Fargo (NYSE:WFC) on stronger loan growth and expense management; Capital One (NYSE:COF) and Discover (NYSE:DFS) on rising consumer leverage and higher capital return.
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