All major indices have fallen into bearish territory at various times this year with the Nasdaq Compound taking one of the biggest hits. It is still down nearly 30% since the start of the year.
The market has made some effort to rally over the past two months, but with so much uncertainty in the economy, it’s hard to know when the bull will finally return. Many Wall Street pundits expect the bear market, or at the very least a correction, to stay with us well into 2023 as a recession looms.
The analysts of Bank of America (BAC -0.44%) say it S&P500 could fall to 3,240 by April, which would represent a drop of around 18% from current levels, before rising to around 4,000 by the end of the year – which is essentially where it is currently.
So with that in mind, one of the best places to invest right now is in bank stocks because they’re cheap, should be able to handle a downturn, and will be strong coming out of any recession. Here are two great options: Bank of America and JPMorgan Chase (JPM 0.60%).
2 big banks benefit from higher interest rates
It may not seem like it by their returns, but Bank of America and JPMorgan Chase have both performed better than most in this market cycle. The main reason is rising interest rates, which significantly boosted their interest income and offset losses from investment banking, asset management and trading operations. Let’s take the most recent quarter as an example.
JPMorgan Chase, the largest bank in the United States, generated $17.6 billion in net interest income in the third quarter, up 34% year-over-year. It accounted for more than half of the company’s $33.5 billion in revenue last quarter.
It was a similar situation for Bank of America, the nation’s second-largest bank. Bank of America generated $13.8 billion in net interest income last quarter, up 24% from the third quarter of 2021. In addition, it accounted for more than half of its $24.5 billion dollars of total revenue for the quarter.
In both cases, net interest income led companies to overall year-over-year revenue gains. With interest rates not dropping anytime soon, these two banks have a good chance of continuing to generate high interest income.
There are two caveats for investors to consider, including lending activity. For both of these banks, lending activity remained robust, with loans increasing year over year. More loans mean more interest income. If there is a recession, it could impact loan growth, although in two quarters of recession this year loan balances have increased further. The other caveat concerns provisions made for credit losses, which rise when the economy crashes and eat away at profits. While credit quality remained solid for both, it’s something to watch.
Why these stocks are buys right now
Not only are they the two largest banks, but they are also the most efficient, best managed and best capitalized of the big banks, so they are best equipped to deal with economic stresses that could lead to reduced activity. loans, deterioration in credit quality or higher provisions for credit losses.
They also had the best long-term returns of the big banks, as the chart shows. Over the past 10 years, JPMorgan Chase has posted an average annual return of 12.2%, while Bank of America has an average annual return of 12.1%.
Additionally, both of these stocks are trading at a discount. JPMorgan Chase has a forward price-to-earnings (P/E) ratio of 10.5, while Bank of America has a forward P/E of 9.6. This is another reason why now is the right time to acquire these two top banking stocks.
Interest rates will remain high for some time, even if inflation eases, which should continue to benefit these stocks well into next year. But ultimately, bank stocks are cyclical, so when the economy and markets begin to emerge from this crisis, bank stocks will be strong coming out of recession and through periods of economic growth. And these are the two best choices to lead the way.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Dave Kovaleski has no position in the stocks mentioned. The Motley Fool holds positions and recommends JPMorgan Chase and Pnc Financial Services Group. The Motley Fool has a disclosure policy.
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