Bank of America has raised a cautionary note about the potential challenges facing bank stocks, suggesting that if the economy takes a downturn and heads into a recession, we might see these stocks suffer further. While the firm isn’t betting on a recession as their primary forecast, their analyst, Ebrahim Poonawala, mentioned that the situation could start to resemble the economic climate of 2000 and 2001 if a recession does occur. He pointed out that if bank stock valuations were adjusted to levels akin to those during the Covid-19 pandemic, the average bank stock covered by the firm could potentially plummet by 48% in a recession scenario.
Poonawala also referenced comments from Treasury Secretary Scott Bessent, noting that the economy is currently experiencing a “detox period” and might “roll a bit” as the government tightens its purse strings under President Donald Trump’s administration. He elaborated that this scenario could lead to a more adverse macroeconomic environment, posing a significant risk to the profit forecasts Bank of America has for financial institutions. He told clients that this marks a considerable shift from the recent expectations for positive earnings per share (EPS) revisions that were anticipated just a few weeks prior.
There is mounting evidence suggesting that the economy is slowing down. Recent reports have highlighted diminishing growth in the job market, increasing layoff statistics, and growing concerns related to tariff policies. President Trump has also hinted at this transitional economic phase in a conversation with Fox News. Concerns over the economy had bank stocks on a slippery slope during Monday’s trading session, with both the SPDR S&P Bank ETF (KBE) and SPDR S&P Regional Banking ETF (KRE) dropping nearly 4%.
Poonawala specifically pointed out that projecting into 2025, large and mid-cap banks might face an average EPS decline of 11%, based on what happened during the 2000-01 recession. He expects that the downturn in commercial and industrial banking sectors, along with credit cards, could contribute to this decline. Despite this, a recession is not currently factored into the firm’s main projections for these stocks.
Conversely, if this transition leads to a period of robust economic growth, Poonawala advised increasing investment in top-tier banking institutions. For larger banks, he highlighted JPMorgan, Wells Fargo, Goldman Sachs, and Morgan Stanley as promising options. For smaller banks, he pointed to Cullen/Frost Bankers, First Horizon, and East West Bancorp as noteworthy investments.
