Bank of America Corporation (BAC) is trading lower by less than 1% in Tuesday's pre-market session after reporting a fourth-quarter 2020 profit of $0.59 per share, $0.05 better than Wall Street expectations, while revenue fell 9.9% year over year to $20.1 billion, well short of $20.76 billion estimates. Credit loss provisions contracted to $100 million despite the pandemic, much lower than $900 million during the last quarter of 2019.

Key Takeaways

  • Bank of America is trading lower after failing to meet revenue expectations.
  • The decline isn't likely to gain traction, given growing tailwinds.
  • The banking industry will face a more restrictive regulatory environment under the Biden administration. 
  • The stock could break out to a multi-decade high after the pandemic runs its course.

The commercial banking sector has been on fire in the past three months, underpinned by a trio of effective vaccines and the promise of additional stimulus under the Biden administration. Bond yields have risen sharply while the yield curve has steepened, setting the stage for higher industry loan margins. Bank of America has benefited from these growing tailwinds, lifting within striking distance of the 2020 high, and could break out after COVID-19 runs its course.

The company authorized the repurchase of $2.9 billion in common stock through March 31, a month after passing the Federal Reserve's latest stress test. These transactions will build shareholder value by reducing the number of publicly traded shares while risking criticism and oversight by activist regulators under the Biden administration. Allies of long-time bank critic and progressive firebrand Senator Elizabeth Warren have just been nominated to those posts.

Wall Street consensus on Bank of America is unlikely to deteriorate despite the mixed metrics, with the stock now rated as a "Moderate Buy" based upon nine "Buy," three "Hold," and one "Sell" recommendation. Price targets currently range from a low of $30 to a Street-high $41, while the stock is set to open Tuesday's session less than $3 below the median $35 target. The "sell-the-news" reaction is unlikely to gain traction, given this humble placement.

Tip

A stock buyback, also known as a share repurchase, occurs when a company buys back its shares from the marketplace with its accumulated cash. A stock buyback is a way for a company to re-invest in itself. The repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. Because there are fewer shares on the market, the relative ownership stake of each investor increases.

Bank of America Monthly Chart (2006–2021)

Chart showing the share price performance of Bank of America Corporation (BAC)

TradingView.com

A multi-year uptrend posted an all-time high at $55.08 in 2006, giving way to a pullback that accelerated into a near-death spiral during the 2008 economic collapse. The stock bounced back into the upper teens in 2010, marking resistance into a breakout following the 2016 presidential election. This bullish impulse topped out in the low $30s in the first quarter of 2018, yielding volatile two-sided action into an October 2019 rally that failed during the pandemic decline.

The selloff found support at the 2016 breakout level in March, ahead of a bounce that stalled at new resistance in June. The stock remounted that barrier in December and pushed above the .786 Fibonacci sell-off retracement level at $31.75, filling the February 2020 gap between $33 and $34 ahead of Tuesday's confessional. Those levels now marks support and resistance, suggesting that the current downturn will be short-lived.

The monthly stochastic oscillator has lifted into the overbought zone but is showing no signs of rolling over, lowering risk despite the less-than-stellar quarterly report. This makes sense because price action operates through a future discounting mechanism that looks at least six months into the future for guidance. As far as we can tell, the second half of 2021 will signal a rebirth for industry and individuals, with the pandemic finally receding into the rearview mirror.

Tip

A discounting mechanism operates on the premise that the stock market essentially discounts, or takes into consideration, all available information including present and potential future events. When unexpected developments occur, the market discounts this new information very rapidly. The Efficient Market Hypothesis (EMH) is based on the hypothesis that the stock market is a very efficient discounting mechanism.

The Bottom Line

Bank of America is trading lower in Tuesday's pre-market after failing to meet revenue guidance.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.