To The Moon

Warren Buffett's $Berkshire Hathaway(BRK.A)$ $Berkshire Hathaway(BRK.B)$ has been dumping a significant amount of its $Bank of America(BAC)$ shares in 2024. Over the past few weeks, around $1.5 billion worth of stocks were sold, adding up to roughly $10 billion since early summer.

Raising Cash Before a Potential Downturn

Berkshire’s motive to sell likely revolves around generating cash ahead of a potential bear market and economic downturn. Buffett has a history of raising cash before major market drops while stepping in to rescue struggling blue-chip stocks during economic recessions. As of June, Berkshire held an impressive $276 billion in cash, earning “risk-free” returns of 4%, 5%, or even more from U.S. Treasuries.

Historically, Bank of America shares have struggled during economic downturns. Out of the last seven U.S. recessions, the stock plummeted six times, with only a slight increase during 2001-2002 following a 50% drop from 1998.

Long-term investors have faced disappointing returns since 2007, as BAC has underperformed both the $S&P 500(.SPX)$ and its financial sector peers. Since early 2008, the stock's total returns have lagged significantly behind its competitors. Even over the past 16 years, its annualized growth has only been +1.7%.

Analysts on High Alert

Buffett's mass sell-off in 2024 has intensified bearish views among analysts regarding the company and its stock outlook. Additionally, unique momentum sell signals have emerged since early August. Investors still holding BAC shares should seriously consider cashing out this year due to potential tax increases in 2025 and 2026. The anticipated drop in capital gains tax rates in 2024 could be another reason for Buffett's sell-off.

If Bank of America's valuation was higher, analysts might recommend holding the stock. However, relative valuation remains moderate compared to other major banks.

One of the biggest worries for BAC is the severe sell-off between July and August, marked by unusual warnings for investors. If earnings peak in 2024, the stock might have limited upward potential. Selling bank and financial stocks during a thriving market seems counterintuitive.

Yet, Buffett’s actions highlight the cyclical nature of the industry. Typically, you get the "cheapest" earning valuations at industry peaks and the "most expensive" ratios during mid-to-late recessions when loan defaults strain income reports.

What Would Keep BAC Above $40?

For Bank of America stocks to hold above $40 in 2025, the economy must stay strong in 2024. We’ll need to see inflation and interest rates fall further, with GDP growth remaining above 2%. Investor confidence in the overall U.S. stock market must also stay exceptionally high, based on sentiment surveys and capital flows.

If any of these pillars—robust stock markets, a stable economy—shift, BAC's price could face downward pressure. Should inflation or interest rates unexpectedly rise or if the economy sinks into recession, investors might sell off stocks, triggering significant risks for lending businesses, including BAC.

Even a mild economic downturn could send BAC shares tumbling below $30 (a 25% drop), while severe economic contraction combined with rising inflation could drive the price below $20 (a 50% decline).

With Bank of America set to hold its Q3 earnings call on October 15, any early signs of increasing loan losses or a lowered overall outlook could act as catalysts for a bearish phase in the stock.