Bank of America Breaks Out as U.S. Financial Risks Continue to Rise

Bank of America is beginning to display a valuation pattern that has not been seen for nearly 18 years.

The bank is finally breaking above its Normal Price, an important Structural Valuation Analysis measure that can help identify when a stock is moving beyond its typical valuation range. Several other major U.S. money-center banks have already reached new valuation highs, while laggards such as Bank of America are now attempting to follow.

On its own, this would be a promising development. What makes the situation particularly interesting is the economic environment in which the breakout is occurring.

The Banking Boom of the 1990s

To understand the significance of the current move, it is useful to return to 1992, when Bill Clinton was elected president of the United States.

The country had experienced years of chronic government deficits. The weakening condition of the federal balance sheet was becoming an increasingly important financial risk.

The Clinton administration responded by increasing taxes, reducing deficits, and eventually producing federal budget surpluses. By the end of Clinton’s presidency, the U.S. economy was strong, unemployment was low, consumer confidence was high, and the stock market was performing exceptionally well.

This improvement in sovereign financial stability was also supportive of the banking sector. Bank of America and other major U.S. banks rose significantly, with their valuations moving toward the higher end of their SVA fair market value ranges.

The Return of Deficits and the Financial Crisis

That environment changed following the election of George W. Bush.

Large tax reductions, increased spending, and a return to substantial government deficits weakened the U.S. sovereign balance sheet. At the same time, excessive credit growth contributed to a major real estate bubble.

When that bubble collapsed, the United States entered its worst economic downturn since the Great Depression. Several major financial institutions failed or came close to failure, and Bank of America’s share price declined dramatically.

The banking sector has spent much of the period since the financial crisis recovering from that collapse.

Bank of America has regained a significant portion of its lost ground, but it remains well below the valuation highs reached during the late 1990s. Its recent move above Normal Price is therefore an important development.

A Curious Contradiction

The economic environment today is very different from the late 1990s.

During the Clinton-era banking rally, U.S. sovereign solvency risk was declining. Today, government debt, deficits, and broader financial system risks are rising.

Despite that, major U.S. bank stocks are performing strongly.

Several banks have moved into valuation territory not seen in approximately 18 years. Bank of America, which has lagged some of its peers, is now showing signs that it may be joining the move.

This creates a notable contradiction. The long-term financial risks facing the United States appear to be increasing, but the current market and valuation signals for the banking sector remain positive.

What the SVA Signal Says

Structural Valuation Analysis is designed to separate economic opinions from observable market signals.

Investors may have legitimate concerns about U.S. debt, financial stability, interest rates, and the possibility of future economic weakness. However, the current SVA signal for U.S. banks remains constructive.

Bank of America’s breakout above Normal Price suggests that the stock may be entering a stronger valuation phase. Similar movements across other major banks strengthen the broader sector signal.

The longer-term risks should not be ignored. For now, however, the trend remains favourable.

Watch Ross Healy’s full analysis here:

https://youtu.be/nBWFbU4e16k

This commentary is provided for educational and informational purposes only. It should not be considered investment advice or a formal recommendation to buy or sell any security.

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