Stay away from these two big U.S. banks as valuations grow stretched, Baird says

Baird analyst David George downgraded JPMorgan to underperform and Bank of America to neutral, citing unattractive risk-reward profiles stemming from elevated valuations following their significant year-to-date outperformance. George's $235 price target for JPMorgan implies 18% downside, while his $52 target for Bank of America suggests 9% upside, arguing that current levels, particularly JPM's record 2.9x tangible book, limit future returns despite their strong franchises. This contrarian call challenges prevailing Wall Street bullishness on these mega-cap banks, suggesting a potential reversal in their recent rally.

Analysis

A recent Baird report initiates a notable contrarian call on JPMorgan (JPM) and Bank of America (BAC), downgrading them to 'underperform' and 'neutral' respectively due to stretched valuations following significant year-to-date outperformance. The analysis posits that JPM's rally of over 20% has pushed its valuation to a record 2.9 times tangible book value and a 15.5 forward P/E, creating an unattractive risk-reward profile with a $235 price target that implies over 18% downside. While acknowledging JPM's 'best-in-class franchise,' the report argues that such high expectations and valuations are primary impediments to future returns. For BAC, which has advanced 8% YTD, the downgrade to 'neutral' reflects a view that the stock is now at fair value, with positive catalysts like improving net interest margins largely priced in. Baird's $52 price target for BAC still suggests over 9% potential upside, indicating a more balanced, albeit less compelling, outlook. This perspective challenges the broad Wall Street consensus, which remains bullish, framing the current market as one where momentum may be overshadowing fundamental valuation risks for these financial sector leaders.

Key Decisions for Investors

• Investors holding JPMorgan should consider trimming positions to realize recent significant gains, given the specific 'underperform' rating and a valuation-based price target implying more than 18% downside risk.
• For Bank of America, the 'neutral' rating and a view of fair valuation suggest a hold-and-monitor approach, as the stock is not seen as excessively overvalued but offers limited near-term upside according to this analysis.
• This contrarian downgrade should prompt a portfolio review focused on valuation metrics for the entire mega-cap banking sector, as the report's core thesis is that high starting valuations will likely suppress forward returns, regardless of franchise quality.
• Monitor whether the market continues to favor momentum over valuation, as a sustained disregard for these metrics would be the primary risk to this bearish-to-neutral thesis.