In 2024, Berkshire Hathaway (BRK.A.US) continued to reduce its holdings in Bank of America (BAC.US), suppressing the returns of Bank of America.

From early September to October, Berkshire Hathaway sold approximately $2 billion of Bank of America stocks, with the reduction starting as early as spring. After this reduction, the proportion of Bank of America stocks held by Berkshire Hathaway decreased to below 10%, which is the key issue.

If the percentage falls below 10%, Berkshire Hathaway no longer needs to report new share-selling activities in a timely manner, and the likelihood of further reduction is high. If the stock price rises, it is almost inevitable that Berkshire Hathaway will further sell Bank of America stocks.

Berkshire Hathaway suppressed the uptrend of Bank of America.

Berkshire Hathaway's reduction in July suppressed the uptrend of Bank of America, and confirmed important resistance levels on the day of the third quarter financial report release. On that day, Berkshire Hathaway made the largest-scale reduction, followed by further reductions within two days.

Looking at the details of the second quarter financial report, Bank of America's share buyback efforts are quite strong, and Buffett typically favors stocks with strong buyback practices.

In the third quarter, Bank of America repurchased $3.5 billion worth of stocks, resulting in a 2.9% decrease in the average number of shares for the quarter. Considering the strong cash flow and balance sheet of Bank of America, it is expected that the bank will continue its strong buyback momentum.

However, what is quite ironic is that Bank of America's share buyback behavior has become a market issue now, as Berkshire Hathaway has set a shareholding ratio threshold.

Bank of America's share buyback will cause Berkshire Hathaway's shareholding ratio to exceed 10%, thereby forcing Buffett to update the shareholding reduction report promptly. Therefore, it is expected that Berkshire Hathaway's shareholding reduction amount will be at least equivalent to Bank of America's share buyback amount.

However, due to Buffett's concerns about the stability of the financial system and the stickiness of deposits, Berkshire Hathaway may continue to reduce its shareholding to get rid of this less than ideal investment in Bank of America.

Institutional Trends Concerns

On the other hand, analysts are optimistic about the US stock market sentiment, providing strong support to the market, which has been hitting new highs. After the release of the third-quarter financial report, analysts have reiterated their ratings and raised the target price, which is equivalent to sending a "moderate buy" signal, indicating a potential 5% to 10% price increase.

The US stock market continues to be driven by positive corrective trends, with the potential for further upside. However, similar to Berkshire Hathaway, institutional investors' trends imply significant risks in the market, while analysts' optimistic sentiment may be leading the market towards a potential "storm".

It is noteworthy that while Berkshire Hathaway is reducing its holdings of Bank of America stocks, institutional investors' sentiment has also turned pessimistic.

In the first and second quarters, institutional investors were generally in a buying trend, but by the third quarter they switched to selling, and in the first two weeks of the fourth quarter they are still continuing the selling trend.

Due to institutional investors holding as much as 70% of the shares, and considering the possibility of Berkshire Hathaway company further selling its Bank of America shares, it is expected that institutional investors will continue to sell, undoubtedly putting enormous pressure on Bank of America's stock price.

In the current market environment, the likelihood of a sustained increase in Bank of America's stock price is not high.

Consumer credit seems prosperous but hidden concerns are gradually emerging.

For Bank of America and the entire banking industry, consumer credit quality is undoubtedly an important risk factor. Although consumer credit demand continues to grow, loan activities have consequently increased by 11%, the credit quality has declined.

Although the current delinquency rate and charge-off rate are still lower than the same period in 2019, the delinquency rate has increased by 175 basis points year-on-year, and the charge-off rate has also increased by 41 basis points, which is a cause for concern.

Currently, the delinquency rate is only 11 basis points lower than the same period in 2019, and the charge-off rate is slightly lower. However, there is a risk of further deterioration before any improvement.

Although the Federal Open Market Committee (FOMC) has cut interest rates, consumers may need to wait for several quarters to feel the actual impact of the rate cut, and the rate-cutting process may be relatively slow.

Bank of America's stock has formed a clear top around $43. This top aligns with Berkshire Hathaway's selling behavior, while the shift in institutional activity has intensified this trend.

If institutions (regardless of whether they have the support of Berkshire Hathaway) continue to sell, then the stock market of Bank of America may find it difficult to continue to rise or maintain its upward momentum. In this scenario, the market is likely to retrace to retest the support around $38, or even possibly lower.

Stock price trend chart of Bank of America

This article is reproduced from the 'Investing' public account, author: Thomas Hughes; edited by Jiang Yuanhua from Zhifatong Finance.