As the market rotation gets underway, with traders and investors showing growth in preferences for small-cap stocks and bonds, a few other cogs in the machine need to be in place first. Historically, whenever the financial markets are about to make a pivot, activity and price action around the financial sector are leading indicators for investors to consider.

Today, the Financial Select Sector SPDR Fund (NYSEARCA: XLF) has started to outperform the broader S&P 500 by as little as 4% over the past 12 months and as much as 6% over the past month alone. This acceleration in bullish price action means the market’s perception is shifting to reward those at the helm, the stocks that could deliver the most upside for investors when the Federal Reserve (the Fed) finally chooses to lower interest rates.

But, not all financial stocks are made equal. There are those, like the Goldman Sachs Group Inc. (NYSE: GS), who are heavily exposed to the business and corporate cycle, and then there are those on the opposite end of banking stocks, like Bank of America Inc. (NYSE: BAC) who are more dependent on commercial banking activity. Investors will see why the latter might be the best choice for what’s coming.

Bank of America Management Bets on the Future of the US Economy

The United States gross domestic product (GDP) rose by 2.8% in the past quarter, but investors should be most concerned about where most of that growth came from. Over a third of this increase came from consumer activity, so it would make sense for Bank of America to keep betting on the consumer.

After seeing a record level of wealth management client deposits, over $4 trillion now on a 10% jump from last year, Bank of America now has extra cash to recycle into other financial products, such as mortgages and credit cards.

However, the rising cost of living has also led to the jump in net charge-offs at Bank of America. This means that more credit card users are falling into delinquency, which makes sense as budgets are tighter and interest expenses are higher. This could change soon, though.

How? If and when the Fed cuts interest rates, which according to the CME's FedWatch tool should be by September 2024 (with over 90% certainty), then interest rates on credit cards will also come down. With access to cheaper money, Bank of America and its customers can return to a healthy consumption spree.

But it doesn't end there; lower interest rates mean lower mortgage rates, and that's good for Bank of America. These new loan products will translate into higher net interest income (NII), a primary driver for investors wanting to determine a bank's stock's direction.

What’s Next for Bank of America Stock? The Future Looks Promising

Management is well aware of how these new trends will affect Bank of America’s NII, and they are now projecting up to 4.3% growth for the next 12 months. Most of this growth is expected to come from held-to-maturity securities, bond holdings bought at the peak of the interest rate cycle, and paying more interest.

As a secondary, mortgage and auto loans will be the drivers behind this NII boost management is forecasting. Having a better idea of what is to come for the bank, up to $25 billion in capital was approved to be allocated to buying back stock. This program represents nearly 7.7% of the bank’s market capitalization.

Leaning on these trends and confident management projections, Wall Street analysts now forecast up to 11.4% earnings per share (EPS) growth for Bank of America, giving investors another bullish factor on which to base their expectations for higher prices ahead.

With all these factors in mind, Barclays decided to slap a price target of $49 a share for Bank of America stock, directly calling for up to 70% upside from where the bank trades today. Even if the stock does take a little while to reach these price potentials, investors can count on the $0.96 payout, which translates to an annual dividend yield of 2.3% to nearly match GDP growth.

But timing is now beginning to favor Bank of America’s profit center. New residential mortgage originations have started to tick up in the past quarter compared to the past two quarters for the bank. The fourth quarter of 2023 saw $3.9 billion in originations, and the first quarter of 2024 was only $3.4 billion, followed by a breakout to $5.7 billion for the most recent quarter.