As the financial sector braces for a recovery phase in capital markets, Bank of America (BAC) finds itself analyzed with a critical eye. Morgan Stanley’s analyst Betsy Graseck has recently marked down BAC’s stock to an equal-weight recommendation, a shift from her previous overweight stance. Despite this downgrade, she has lifted her price target from $48 to $55, reflecting an approximate 18% upside based on the stock’s last closing price. This marks a pivotal moment for investors, as Bank of America demonstrates a solid 39% gain year-to-date. The question remains: how sustainable is this growth in light of market dynamics?
Graseck’s revised outlook paints a nuanced picture. Though she recognizes that Bank of America will benefit from an eventual recovery in capital markets, her analysis suggests that other financial institutions more heavily invested in trading and investment banking could outperform BAC. In 2026, Graseck projects that Bank of America’s revenue from these segments will only amount to 27%, in stark contrast with Citigroup and Goldman Sachs, which she forecasts will generate 32% and 68% of their revenues, respectively, from similar activities. This disparity raises critical concerns about Bank of America’s reliance on credit exposure, particularly in volatile market conditions.
The forthcoming economic landscape under a potential second Trump administration could lead to a relaxation of financial regulations, which might benefit Bank of America. However, Graseck emphasizes that the banks with a more pronounced focus on capital markets are poised to gain more significantly in this scenario. The implications of rising interest rates also cannot be ignored; if 10-year yields increase, the challenge of unrealized losses in held-to-maturity securities—which currently sit at $86 billion—could significantly burden BAC’s stock performance.
Despite the concerns surrounding Bank of America’s market positioning, there are indeed silver linings. Graseck identifies potential improvements in net interest margins and ongoing growth strategies as key drivers for the bank’s future. The institution’s approach to responsible growth, characterized by stringent underwriting practices and superior credit quality, has allowed it to maintain lower loan loss ratios than its competitors under rigorous stress-test scenarios conducted by the Federal Reserve.
In a broader analysis, Graseck recently upgraded Bank of New York Mellon and State Street to overweight status, citing the former’s robust operating leverage and the latter’s promising net interest margin expansion as tailwinds for their performance. These banks have risen by 55% and 27% YTD, demonstrating that other financial institutions may have stronger momentum and growth trajectories. Consequently, while Bank of America has made significant strides this year, savvy investors may want to weigh its relative positioning against these more capital market-oriented competitors to assess long-term sustainability and profitability.