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3 Banking Stocks Set to Rally with Expanding Money Supply

Bank of America logo sign investment bank

Key Points

  • Now that the Fed is increasing the M2 money supply across the economy, financial stocks could outperform the market in the coming months. 
  • Three banks stand out because they are exposed to commercial and investment banking profit centers, aided by rising market liquidity.
  • Wall Street analysts see enough upside in these stocks to back up the view of higher ceilings ahead for investors to consider.
  • 5 stocks we like better than JPMorgan Chase & Co..

One of the most significant economic indicators has just turned into expansion mode after leaving investors concerned about the Federal Reserve (the Fed) not following through with its plans to cut interest rates by the end of 2024. The M2 money supply is now back into expansion to change its previously steady contraction path, and that’s good news for those with buying power.

On a year-over-year basis, the United States money supply is up slightly. However, despite how slight its increase may be, the drivers behind the expansion are what matters to investors today. The Fed typically starts to print money in preparation to cut interest rates, as it is part of the ‘quantitative easing’ package for the economy.

Financial stocks like Bank of America Co. NYSE: BAC. J.P. Morgan Chase & Co. NYSE: JPM and even Wells Fargo & Co. NYSE: WFC are the top choices for investors to start riding the bullish side effects of the new Fed’s path. Because this new injected currency will likely end up in the hands of consumers, here’s how these banks are set to benefit today.

Stock Rally Potential: Bank of America's Balance Sheet vs. Slowing Trends

Bank of America Today

Bank of America Co. stock logo
BACBAC 90-day performance
Bank of America
$44.17 +0.79 (+1.82%)
(As of 12/20/2024 05:45 PM ET)
52-Week Range
$31.27
$48.08
Dividend Yield
2.35%
P/E Ratio
16.06
Price Target
$45.92

Looking at Bank of America’s latest quarterly results presentation, investors can see how the mortgage department has been a pain point over the past year. Residential mortgage loans contracted by 12% over the past 12 months, severely compressing the bank’s net interest income (NII).

However, because the money supply is on the rise, this money will likely end up in the hands of banks like Bank of America, which can have a more flexible lending program to ride on the potential mortgage demand that is to come. How can investors gauge this trend?

Bank of America MarketRank™ Stock Analysis

Overall MarketRank™
97th Percentile
Analyst Rating
Moderate Buy
Upside/Downside
4.0% Upside
Short Interest Level
Healthy
Dividend Strength
Strong
Environmental Score
-0.50
News Sentiment
0.42mentions of Bank of America in the last 14 days
Insider Trading
Selling Shares
Proj. Earnings Growth
11.62%
See Full Analysis

Multifamily property value is down nearly 10% in the past year, and rising liquidity through money supply is a precursor to the Fed cutting rates, which would be suitable for a mortgage business recovery at Bank of America. But there’s another hidden benefit to lower rates.

Because Bank of America’s financials show roughly $842 million in debt securities synonymous with bonds, the stock’s book value could rally in the coming months. Because bond values move opposite to interest rates, interest rate cuts from the Fed could significantly boost the book value for this stock.

Despite slowing trends, Bank of America’s balance sheet could be the key for investors to unlock further upside. But how much upside? Oppenheimer suggests approximately 17% from where the stock trades today, as they placed a $46 a share price target for the bank.

Wells Fargo's Commercial Strategy Drives Away Short Sellers

Wells Fargo & Company Today

Wells Fargo & Company stock logo
WFCWFC 90-day performance
Wells Fargo & Company
$70.34 +1.49 (+2.16%)
(As of 12/20/2024 05:45 PM ET)
52-Week Range
$46.12
$78.13
Dividend Yield
2.27%
P/E Ratio
14.62
Price Target
$67.49

Wells Fargo is arguably the more commercial of the three banks. It focuses more on the industry's consumer lending side, allowing the bank to tap into much more upside than meets the eye.

At what could be the bottom of the mortgage cycle, Wells Fargo’s quarterly earnings presentation shows that mortgage loan originations reached their lowest volume all year. Like Bank of America, this company holds many bonds on its balance sheet. These assets could be worth a lot more in the coming months.

Wells Fargo & Company MarketRank™ Stock Analysis

Overall MarketRank™
87th Percentile
Analyst Rating
Moderate Buy
Upside/Downside
4.1% Downside
Short Interest Level
Healthy
Dividend Strength
Moderate
Environmental Score
-0.35
News Sentiment
0.60mentions of Wells Fargo & Company in the last 14 days
Insider Trading
Selling Shares
Proj. Earnings Growth
0.74%
See Full Analysis

How much? The bank’s financials will reveal up to $380 million in bonds, or roughly 1.8% of the bank’s market capitalization. Seeing how the market is willing to pay a 30% premium to the stock’s book value as its price-to-book (P/B) multiple of 1.3x shows.

Even though the stock trades at 94% of its 52-week high price, Wall Street expects further upside in the next few quarters. Evercore analysts felt comfortable placing a valuation of up to $67 a share for Wells Fargo stock, daring it to rally by 13.5% from its current level.

Facing all this upside and coming bullish trends, bearish traders stopped trying to cap this stock away from its potential. Over the past month, Wells Fargo stock’s short interest declined by 4.7%, showing this trend in action.

JP Morgan's Investment Banking Edge Positions It for Maximum Upside

JPMorgan Chase & Co. Today

JPMorgan Chase & Co. stock logo
JPMJPM 90-day performance
JPMorgan Chase & Co.
$237.60 +4.64 (+1.99%)
(As of 12/20/2024 05:40 PM ET)
52-Week Range
$164.30
$254.31
Dividend Yield
2.10%
P/E Ratio
13.22
Price Target
$234.81

This bank is not only exposed to having access to mortgage and consumer lending through its Chase arm. J.P. Morgan Chase has a sizeable investment banking branch that can further boost profits aside from the commercial activity it already enjoys.

As money supply hits the market with newfound liquidity, mergers and acquisitions (M&A) activity could boost, as buyouts and corporate actions often depend on accessible and cheap financing rates with ample liquidity.

JPMorgan Chase & Co. MarketRank™ Stock Analysis

Overall MarketRank™
81st Percentile
Analyst Rating
Hold
Upside/Downside
1.2% Downside
Short Interest Level
Healthy
Dividend Strength
Strong
Environmental Score
-0.80
News Sentiment
0.32mentions of JPMorgan Chase & Co. in the last 14 days
Insider Trading
N/A
Proj. Earnings Growth
-5.22%
See Full Analysis

More than that, the entire financial market will see more available liquidity, leading this bank's sales and trading department to expect higher commission revenue and proprietary trading profits.

Analysts at the UBS Group may have taken this trend into account when they slapped a $224 price target on J.P. Morgan Chase stock, calling for up to 14% upside from where the stock sits today, which is already a bullish momentum-filled 96% of its 52-week high.

More than having greater exposure to the consumer and business cycles, J.P. Morgan's financials show up to $422 million held in bonds. Adding this potential upside to the stock's book value on rising bond values justifies the market's paying a 1.8x P/B multiple for this stock.

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Should you invest $1,000 in JPMorgan Chase & Co. right now?

Before you consider JPMorgan Chase & Co., you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and JPMorgan Chase & Co. wasn't on the list.

While JPMorgan Chase & Co. currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

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Gabriel Osorio-Mazilli
About The Author

Gabriel Osorio-Mazilli

Contributing Author

Value Stocks, Asian Markets, Macro Economics

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Wells Fargo & Company (WFC)
4.3402 of 5 stars
$70.34+2.2%2.27%14.62Moderate Buy$67.49
Bank of America (BAC)
4.8572 of 5 stars
$44.17+1.8%2.35%16.06Moderate Buy$45.92
JPMorgan Chase & Co. (JPM)
4.0617 of 5 stars
$237.60+2.0%2.10%13.22Hold$234.81
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