On Friday, Baird issued a new research note that shook up Wall Street’s view of two banking giants. Analysts at Baird downgraded both JPMorgan Chase & Co. (NYSE: JPM) and Bank of America Corp. (NYSE: BAC), citing concerns over their current valuations. The firm noted that shares in the large-cap banking group had little room left to rise, given how much they’ve already climbed.
JPMorgan took the bigger hit. Baird cut its rating from “neutral” to “underperform,” signalling expectations of weaker performance ahead. They also slashed the price target for JPMorgan to $235, well below its June 26 closing price of $288.75.
Bank of America wasn’t spared, though the downgrade details were less dramatic. Its shares slipped by 0.33%, while JPMorgan dropped by 0.94% following the news.
The analysts warned that, with high valuations across the sector, investors should be cautious. In their view, the recent rally has left little upside for these banking heavyweights. As a result, Baird suggested looking elsewhere for growth opportunities, at least for the time being.
For shareholders, it was a sobering reminder: even the biggest banks can run out of steam when expectations get too high.
Analysts have taken a close look at the stock’s valuation and see some lofty expectations baked in. At its current price, the shares trade at approximately 2.9 times tangible book value (TBV), with a capitalisation-to-assets ratio of 18.2% and a pre-provision net revenue (PPNR) multiple of 9.5 times. These figures suggest investors are betting on the company to deliver a return on assets (ROA) of more than 1.50% indefinitely.
However, the story painted by Wall Street’s consensus is different. Forecasts for 2026 peg ROA at just 1.21%, well below what the market valuation implies. This gap has caught the attention of market watchers.
Baird, for one, acknowledged JPMorgan’s undeniable strengths: a dominant market position, a robust capital base, and a consistent track record of outperforming peers. Yet, they warned that current expectations may have outpaced reality.
Even when running optimistic scenarios, Baird found it hard to justify such a rich valuation. The numbers, they said, simply don’t add up unless one believes in a future far brighter than what most forecasters expect.
For now, the market is telling a story of unending success, but some analysts are urging investors to read between the lines.
Even under highly optimistic scenarios, the numbers aren’t quite as rosy as some might hope. Analysts ran aggressive models, factoring in a massive, hypothetical $70 billion share buyback, just to push the bank’s Common Equity Tier 1 (CET1) ratio up to 12%. Even then, the best-case pro forma return on tangible common equity (ROTCE) for JPMorgan would be about 24.5%.
Using Baird’s regression model, the TCEE translates to a share price value of roughly $263. While that figure sounds impressive at first glance, it comes with an important caveat. The analysts were quick to point out that these calculations merely underscore a larger point: returns for JPMorgan shareholders are likely to fall short of the robust gains seen in recent years, especially at today’s elevated valuation levels.
Meanwhile, sentiment has cooled for Bank of America as well. The bank was downgraded from “outperform” to “neutral.” Its price target now sits at $52.
In this environment, even bold assumptions can only take valuations so far.
Bank of America’s stock recently finished the trading day at $47.46, marking a strong run in recent months. Back in April, Baird upgraded their outlook on BAC, arguing that Wall Street was underestimating the bank’s true earnings potential.
Since Baird’s upgrade, the shares have steadily climbed. The brokerage now observes that the stock is trading at nearly 10 times its normalised earnings per share — a valuation that reflects renewed investor confidence. This multiple suggests that the market now expects Bank of America to deliver more substantial and more consistent profits than previously assumed.
Baird also notes that the current price is discounting a return on assets (ROA) of about 1%. That’s a level of profitability above what analysts had forecast for both 2025 and 2026. In other words, investors are pricing in a brighter future for BAC than consensus estimates suggest.
This shift signals a notable shift in sentiment surrounding the stock. Just months ago, the market was cautious; now, optimism is building, with expectations rising accordingly.
Bank of America’s capitalisation-to-assets ratio hovers around 11%, highlighting the bank’s solid financial footing. This healthy capital position is a reassuring sign for investors, especially as the industry faces ongoing regulatory scrutiny and economic uncertainty. The current market valuation of BAC seems to factor in expectations for rising net interest margins, which have benefited from recent shifts in interest rate policy. Additionally, the bank’s capital markets division appears to be gaining strength, contributing to a more optimistic outlook for future earnings.
Baird, meanwhile, maintains a favourable view of the Bank of America franchise. The firm points to BAC’s diverse revenue streams and nationwide reach as key advantages in a competitive landscape. However, Baird also notes that, at today’s share price, the risk and reward profile looks evenly matched. In other words, much of the good news may already be reflected in the market price.
Zooming out to the broader sector, banks continue to navigate a challenging environment characterised by shifting monetary policy and evolving consumer behaviour. For Bank of America, strong capital levels and improving profitability provide a degree of stability; however, investors should remain mindful of potential headwinds on the horizon.
Across the broader banking sector, analysts note that U.S. banks are now nearing fair value territory. The sector, as a whole, is trading at roughly six times forward pre-provision net revenue (PPNR) — a level consistent with the average seen since the financial crisis. However, there is significant variation within the group.
Mega-cap banks, the giants of the industry, currently look expensive. Their stock prices have drifted above what fundamentals justify, possibly reflecting investor preference for scale and perceived safety.
In contrast, regional banks tell a different story. These smaller institutions are undervalued compared to their larger peers. Lower investor expectations have weighed on their share prices, but this has also created pockets of opportunity.
Analysts at Baird are particularly drawn to select regional names. They believe these banks offer more attractive valuations and better potential for upside as sentiment improves. In this landscape, careful stock picking is key.
In recent months, the American banking sector’s landscape has begun to resemble a well-worn path, returning to familiar ground. Observers across Wall Street have taken note: U.S. banks, collectively, are approaching what many would consider fair value. When measured by forward pre-provision net revenue — a favoured yardstick among analysts — the entire sector is changing hands at around six times earnings, mirroring the average multiples seen in the aftermath of the 2008 financial crisis.
Yet, within this broad terrain, the scenery changes depending on where you look. The towering mega-cap banks — the giants that dominate the skyline — find themselves trading at somewhat lofty prices. Their valuations have crept above what their financial performance might warrant, perhaps because investors are drawn to their sheer size and the sense of security that comes with it. In uncertain times, the biggest ships often seem the safest harbours.
But venture away from the shadow of these behemoths, and a different narrative unfolds. The regional banks — smaller in scale but nimble and deeply rooted in their local communities — have struggled to capture the same level of investor enthusiasm. Their shares trade at lower valuations, weighed down by muted expectations and lingering scepticism about their prospects. Yet, this very caution has carved out intriguing opportunities for those willing to look past the headlines.
Among those taking notice are analysts at Baird. With a discerning eye, they’ve identified select regional banks as particularly compelling. In their view, these institutions not only offer more attractive entry points but also hold greater promise for gains should market sentiment begin to shift. In this environment, they argue, the key lies in thoughtful selection — finding those undervalued gems poised to benefit as perceptions evolve.
And so, as the banking sector meanders toward equilibrium, it’s clear that beneath the surface, the story is one of contrasts: giants that may be overvalued by virtue of their stature, and smaller players quietly waiting for their moment in the sun. For investors and observers alike, the real opportunity may lie in knowing where to look — and when to act.
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