Passing Stress Tests Could Bring Bank Dividend and Buyback Announcements
We're keeping an eye on Fed speakers today, and the results of the bank stress tests Wednesday. Here's what to watch.
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* With no fresh data, Fed speakers will reiterate the need to see more good data ahead of Friday’s May PCE data.
* Flash June PMI data from S&P Global supports further progress on inflation.
* Bank stress test results to be published after Wednesday’s market close.
* What could lead us to lift our Morgan Stanley and Bank of America price targets.
Other than June Consumer Confidence out at 10 a.m. ET today and May New Home Sales tomorrow at 10 a.m. ET, the market will likely take its cues from the latest parade of Fed speakers as it gets ready to close the books on the current quarter. Even though rolling GDP forecasts like those published by the Atlanta Fed do not incorporate last week’s June Flash PMI data from S&P Global, it found the U.S. economy growing above trend, more jobs being added, and further progress on inflation. This, along with the May CPI and PPI data, suggests we’re going to hear Fed speakers this week say that yes, signs are encouraging but we will still need to see more progress.
Recognizing that, the comment from Fed Governor Michelle Bowman (voting FOMC member) that the Fed is "not yet at the point where it is appropriate to lower the policy rate" was unsurprising to us. As we discussed in yesterday’s Daily Rundown video, the next data point to watch will be Friday’s May PCE Price Index.
Bank Stress Tests, Morgan Stanley and Bank of America
Before we get to that inflation report and its implications, folks invested in or closely watching banks and related financial companies are waiting for the Fed to publish the results of its latest round of bank stress tests late Wednesday afternoon. Under the "stress test" exercise, the Fed tests big banks' balance sheets against a hypothetical scenario of a severe economic downturn, the elements of which change annually. The scenarios change each year but this year it will likely include a slump in the commercial real estate market and a global stock market shock.
Once the findings of these stress tests are known, banks and related companies have usually made new dividend announcements and, in some cases, updated share-repurchase programs. We recently noted that Morgan Stanley MS paid out its fourth $0.85 per share dividend in May, and another increase would be one reason for us to revisit our current price target. The same is true for shares of Bank of America BAC, which are up nearly 40% since we started buying the stock back in March 2023.
Our respective price targets of $105 and $41 for MS and BAC are slightly above the market consensus targets of $99 and $40 but are well below some of the more aggressive ones out there.
Continued improvement in the IPO and M&A market would be another reason for us to revisit both of those price targets. The IPO pipeline continues to grow, with fashion retailer Shein confidentially filing for a London IPO. Meanwhile, reports indicate beleaguered Boeing BA has offered to buy Spirit Aerosystems SPR for $35 per share, potentially the latest deal pointing to an active M&A market.
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- Weekly Roundup: Prepare to Be Selective
- Signals From Our Investing Notebook
At the time of publication, TheStreet Pro Portfolio was long MS and BAC.
