Bank of America Corp. (BAC) is one of the most-traded stocks on Wall Street. It’s also a breeding ground for debate. Both bullish and bearish sentiments are strong and for good reason.

Strategy Change

After Bank of America’s disastrous 2008-2009, it has done its best to shift away from big acquisitions and nonperforming loans. It’s also doing everything it can to cut expenses. At the same time, it’s growing its mortgage loan and credit card businesses, which deliver strong profits. In short, Bank of America has become very bottom-line-focused. It is expected to deliver $13 billion in earnings in fiscal year 2015. This is good news for investors seeking dividends and share buybacks. (For more, see: Top 7 Biggest Bank Failures.)


A big risk at the moment is foreclosures. This probably sounds like an old story. Due to court proceedings, Bank of America has been forced to hold onto these properties for long periods of time, which means maintenance costs, taxes and home owner's association fees. When Bank of America finally sells these properties, it’s likely going to see returns of pennies on the dollar. This would mean more write-downs. Another risk is a flattening yield curve. If short-term rates increase, it will cost Bank of America more to borrow money. If long-term rates drop, it will earn less on its loans. That's not a good spread.

Bank of America is highly likely to be nearing the end of its litigation nightmare, but it’s still possible for more mortgage-backed security litigation to occur. (For more, see: The Risks of Mortgage-Backed Securities.)

The biggest risk to Bank of America is something it can’t control. Bank of America is a good indicator of how the U.S. economy is performing. Look at its stock since its initial public offering and this will be clearly evident. The state of the U.S. economy plays a major role in the performance of Bank of America.

It has 57 million customers. There are 319 million people in the United States. Think about the small degree of separation in relation to family member and business associate relationships with Bank of America. Translation: The U.S. economy and Bank of America's stock are tightly tied together. That being the case, what should we expect from the U.S. economy? (For more, see: How Bank of America Holds 1/8 of All U.S. Deposits.)

Economy Expectations

The wide opinion on Wall Street is that stocks will continue to appreciate in 2015, but not at the same pace as in recent years. As far as Main Street goes, unemployment should remain relatively the same. Wage growth is the real challenge. I could go through all expectations, but the truth is that it's not what matters most right now. What matters most is the Eurozone and the risk of contagion.

If the Eurozone can stave off deflation with its accommodative monetary policy, then all should be well. The problem is that deflation can’t be prevented with monetary policy. Deflation will always win in the end. Therefore, all central bank actions around the world, not just the European Central Bank, will likely end up doing nothing but adding more debt. Deflation and a debt crisis would eventually find its way back to the United States. (For more, see: The Top 6 Ways Governments Fight Deflation.)

The good news is that this will take a while to play out. It’s very possible that Bank of America delivers a good year for investors. However, risks remain high over the next several years. Bank of American is currently trading at 44 times earnings (as of Feb. 26, 2015). It yields 1.20%. Over the past three years, the stock has appreciated 106.88%. Over the past year, it has depreciated 1.06%. (For more, see: Top 10 Financial Stocks for 2015.)

The Bottom Line

Since it’s impossible to time the broader market, no prediction can be made with any conviction. If I were forced to give an opinion, I wouldn’t expect the stock to pop or drop significantly for the remainder of 2015. That said, while the upside potential is there over the next year, I wouldn’t be comfortable owning the stock due to the aforementioned risks. A missed opportunity is always better than a loss. (For more, see: Bank of America vs. Morgan Stanley (BAC, MS).)

Dan Moskowitz does not own any shares of BAC.

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