Warren Buffett's Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) has been selling off a significant portion of its substantial holdings in Bank of America (NYSE:BAC) since 2024. Last week, another large-scale sale report was filed with the SEC. Overall, approximately $1.5 billion worth of shares have been sold in the past few weeks, and about $10 billion have been sold since early summer.

This is not the only stock he has sold. Other targets of his sales include his largest holding—Apple.

Berkshire Hathaway's desire to sell stocks is likely to raise cash before a bear market and a U.S. economic recession. Mr. Buffett has a history of raising cash before major market crashes, while rescuing troubled Wall Street blue chips during U.S. economic recessions. As of the end of June, Berkshire managed an incredible cash position of $276 billion, earning a "risk-free" return of 4%, 5%, or even higher from U.S. Treasury bonds.

Take Bank of America as an example, in 6 out of the last 7 U.S. economic recessions, the stock price has plummeted. There was only a certain degree of increase in 2001-2002, and before that, the stock price fell by 50% since 1998.

Unfortunately for long-term investors in Bank of America, since 2007, the stock has been a long-term "underperformer" in the S&P 500 index and financial stocks. Below is a total return chart of the stock compared to other stocks since the beginning of 2008, and the second chart highlights the equally poor returns since the beginning of 2022. Over the past 16 years, the stock's annualized return has been only +1.7%.

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In addition, since peaking in January 2022, Bank of America has lagged behind the top lenders in the U.S. money center banks, ranked by loan size, and the largest brokerage stocks, as shown in the chart below. The analyst's ranking list includes JPMorgan Chase, Citigroup, Wells Fargo, American Express, Charles Schwab, and Goldman Sachs.

To be honest, Buffett's massive liquidation spree in 2024 has reinforced analysts' bearish outlook on the company and its stock quotes. In addition, since early August, a unique momentum sell signal has appeared on the chart, indicating that investors who still hold the stock should seriously consider making any trading/investment gains this year, as tax rates may rise next year and in 2026. (It is expected that the capital gains tax rate will decrease in 2024, which may be the second excuse for Buffett's sale.) In the near future, the government will be forced to raise taxes on the wealthy to reduce our spending deficit.

Of course, if Bank of America's valuation were higher, analysts might be willing to rate its stock as a hold. However, compared to other large banks and lending institutions, Bank of America is now subject to U.S. economic events, and its valuation setting is relatively "average."

Due to the current high profitability rate, the trailing price-to-earnings ratio of 14 times is at a low level. We are in a situation where the world's best banking conditions are on one hand, with high borrowing interest rates for loan issuance, and on the other hand, limited loan default rates. During periods of economic prosperity, BAC's focus on consumer and small business loans seems to be a winner. During U.S. economic recessions, operational problems will arise as credit quality issues and loan write-offs surge.

Compared with peers and competitors, the price-to-sales ratio is at a high level because investors are currently focusing on strong revenue creation levels.This combination has created a profit margin of over 24%, which is a very positive level compared to the industry (more favorable for investors if the profit margin remains high throughout the economic cycle). Strong revenue levels undoubtedly encourage investors to remain optimistic for the 2023-24 period.

The factor ratings of the quantitative system are mixed. Similarly, the long-term valuation situation of Bank of America's specific numbers and direct comparisons with the banking industry only support a "C-" rating. The positive points come from its peak profitability levels, with a reading of "A+" in October 2024.

The main concern for analysts regarding the trading behavior of Bank of America's stock comes from the vicious selling in July to August, which included a rare warning to investors. If profits peak in 2024, then the stock's upside potential will be very low. When market conditions are good and have been sustained for several years, it seems senseless to sell bank and financial stocks. However, Warren Buffett did so (he liquidated most of his bank/financial holdings during 2023-24) because the industry is highly cyclical. Typically, at the peak of the industry, you will get the "cheapest" profit valuation statistics, and in the mid-to-late stages of a U.S. economic recession, when loan write-offs lead to net losses in income reports, you will get the most expensive ratios.

The current leverage ratio of total liabilities to equity (book value) is close to 11:1, as shown below (the ratio of liabilities to assets is 0.91 times). Bank of America is at a medium level among banking peers. In other words, if 9% of its assets (including loans) lose value to near zero during a severe economic shock, Bank of America could theoretically go bankrupt, and the stock price would fall to $0 (without government intervention like the 2008-09 financial crisis).

The only positive factor that analysts can find for Bank of America shareholders is that the annual trailing dividend yield is close to 2.5% (management indicates a future dividend yield of 2.6%). The cash distribution rate for existing investors is at a higher level among peers, approximately twice the current 1.2% of the S&P 500. Nevertheless, it will not provide much protection in the case of a U.S. economic recession, and there is still a significant gap compared to the risk-free yields of over 4.5% from short-term cash investments like CDs and U.S. Treasury bonds.

What could keep Bank of America's stock price above $40 in 2025? The answer is that the "Goldilocks" economy of 2024 must continue. We need to see further declines in inflation and interest rates. The economy cannot slow down from today's real GDP growth rate of over 2%. Moreover, confidence in the overall U.S. stock market must remain unusually strong (based on sentiment surveys and capital flows).

If any of the three pillars of a booming stock market and a robust economy reverse, Bank of America's stock price could be affected. In addition, if the current situation reverses, interest rates/inflation rates rise unexpectedly, the U.S. economy falls into a recession, and investors decide to sell stocks instead of buying them, all lending businesses, including Bank of America, will inevitably face significant downward "risk."

Even a mild U.S. economic recession could easily push Bank of America's stock price below $30 (equivalent to a 25% drop in stock price), and a significant downturn in economic activity coupled with a rise in inflation rates could push the stock price below $20 (equivalent to a 50% drop in stock price). This seems to be the risk side of the investment equation that managers of Berkshire Hathaway (such as Buffett) are concerned about.

Of course, the losses caused by the technical selling in July to August are hard to ignore. This is very similar to the pattern of weak performance of many large technology stocks since late spring.

As Bank of America plans to hold a third-quarter earnings call on October 15, any signs of trouble caused by increased loan losses at the beginning of 2025, or overall guidance downgrades, could become a catalyst for the beginning of a bearish phase in the stock price.