The blazing rally in shares of this megabank can keep going.
Shares of Bank of America (BAC -0.34%) surged following the release of its latest quarterly earnings. The megabank beat expectations with results benefiting from a resilient economic backdrop and improving credit conditions. The stock is up an impressive 31% year to date, climbing back to its highest level since early 2022.
The positive headlines are encouraging, but are they enough to keep the rally in Bank of America stock going? Here's what investors need to know.
A recap of Q2 2024 earnings from Bank of America
Bank of America reported second-quarter earnings per share (EPS) of $0.83, ahead of the average Wall Street estimate of $0.80. Revenue of $25.4 billion was above the $25.2 billion forecast, and up 1% year over year.
The story this quarter was the momentum from the global wealth and investment management business, where revenue increased 6% from the prior-year quarter, driven by higher fees and net asset under management flows. Segment client balances reached a record $4 trillion, up 10% from Q2 2023, in part based on the appreciation of asset valuations this year.
The bank's global markets segment is also capturing the strong performance in financial markets boosting sales and trading activity. An industry theme has been the rebound in mergers and acquisitions with Bank of America generating higher fees adding to its investment banking fees this quarter.
On the other hand, the trends from the consumer banking group were more mixed. While segment revenue and net interest income were down from last year as higher deposit costs offset higher asset yields, average loans and leases did manage a modest 2% year-over-year increase.
Image source: Getty Images.
Management is pointing to solid consumer banking operating metrics including a gain in market share. The bank added 278,000 net new checking accounts, marking 22 consecutive quarters of growth. Higher credit and debit card spending is taking place as net charge-offs across the companywide loan portfolio have favorably stabilized.
CEO Brian Moynihan commented on these dynamics during the earnings conference call, saying, "So if you think about consumer credit, the card charge-offs drive it and have flattened out in terms of delinquencies, and we expect them to improve in the second half."
This tone of optimism is an important signal for both underlying consumer credit conditions and the broader U.S. economy as a whole.
On the balance sheet, the bank ended the quarter with a standardized Common Equity Tier 1 Capital Ratio of 11.9%, up from 11.3% in Q2 2023. The indicator suggests the bank is well positioned to withstand credit losses in the event of an unexpected economic shock.
Last month, Bank of America moved forward with an 8% increase to a new quarterly dividend rate of $0.26 per share. On a forward basis, shares yield 2.5%.
Reasons to stay bullish on Bank of America
Bank of America is proving it can generate organic growth despite the challenging macro environment in recent years.
The bullish case for the stock considers the possibility that the Federal Reserve moves forward with interest rate cuts given the declining inflation outlook. This scenario would likely drive a resurgence in credit demand and lending activity, representing a new earnings tailwind for the bank.
Financial efficiency efforts such as reducing the number of branch locations and investing in the digital infrastructure can ultimately support a higher valuation.
On this point, Bank of America is trading at 13.6 times its consensus 2024 earnings per share of $3.22, as a forward price-to-earnings (P/E) ratio, and 1.3 times its book value. Both of these multiples are below their levels in 2022 when the stock reached its all-time high.
There is a case to be made that the bank's long-term outlook today is stronger than ever, and the stock is undervalued with room for more upside.
BAC PE Ratio (Forward) data by YCharts
The rally can continue
As long as economic growth remains steady, I believe Bank of America should continue delivering positive shareholder returns. For investors with a long-term time horizon, the stock can make a great addition to a diversified portfolio.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.
