Baird Downgrades JPMorgan and Bank of America on Valuation Concerns

Major bank stocks face heightened valuation scrutiny as investment firm shifts focus toward regional banking opportunities

Key Takeaways

• JPMorgan downgraded to “underperform” with $235 price target — Baird cuts rating from neutral, citing overvaluation as stock trades at 2.9x tangible book value despite consensus ROA forecasts of only 1.21% for 2026.
• Bank of America reduced to “neutral” from “outperform” — Rating adjustment comes after shares appreciated to match 10x normalized EPS, with new $52 price target versus current $47.46 trading level.
• Mega-cap banks deemed overpriced while regionals offer value — Baird shifts preference toward regional banks due to lower investor expectations and stronger valuation support across the sector.

Introduction

Investment firm Baird has downgraded two of America’s largest banks, signaling a shift in sentiment toward the mega-cap banking sector. JPMorgan Chase faces a reduction to “underperform” while Bank of America drops to “neutral,” both driven by valuation concerns rather than operational weaknesses.

The downgrades reflect growing analyst caution about elevated stock prices in large-cap banking. Baird’s assessment centers on risk-reward imbalances as these financial giants trade at premium valuations that may not align with near-term earnings potential.

Key Developments

JPMorgan receives the more severe downgrade, falling from “neutral” to “underperform” with a $235 price target. This represents a significant discount to the stock’s recent trading level of $288.75, highlighting Baird’s concerns about the bank’s current valuation metrics.

The analysis points to JPMorgan trading at 2.9 times tangible book value and 9.5 times pre-provision net revenue. These multiples suggest expectations for return on assets exceeding 1.50%, while consensus forecasts for 2026 project only 1.21% ROA.

Bank of America faces a less dramatic adjustment, moving from “outperform” to “neutral” with a $52 price target. The stock trades at $47.46, representing a more modest valuation gap compared to JPMorgan’s situation.

Market Impact

The downgrades arrive as both banks demonstrate solid operational performance. JPMorgan maintains a 2025 P/E ratio of 12.2, slightly above Bank of America’s 11.9, reflecting continued investor confidence in earnings stability.

Bank of America shows strong momentum with Q2 2025 EPS projected at $0.90, representing 6.9% year-over-year growth. Revenue expectations reach $26.8 billion, marking a 5.6% increase from 2024 levels.

Recent quarterly results support this trajectory, with Q1 2025 delivering a 9% EPS beat and 1.7% revenue beat. The performance demonstrates resilience in net interest income and trading revenues amid challenging market conditions.

Strategic Insights

Baird’s analysis reveals a broader recalibration within the banking sector. U.S. banks approach fair value territory, with mega-cap institutions slightly overpriced while regional banks remain undervalued.

The sector trades at approximately 6 times forward pre-provision net revenue, aligning with post-crisis historical norms. However, significant variation exists across different bank categories, creating opportunities for selective investors.

Regional banks emerge as Baird’s preferred category due to lower investor expectations and stronger valuation support. This preference shift reflects the firm’s view that mega-cap banks have outrun their fundamental support levels.

Expert Opinions and Data

Baird acknowledges JPMorgan’s market position while questioning sustainability. According to Investing.com, even assuming a $70 billion buyback to achieve a 12% CET1 ratio, the bank’s hypothetical return on tangible common equity would reach 24.5%.

“We understand the optimism, but we still believe they (valuations) are one of the primary drivers of forward returns,” Baird stated. This perspective emphasizes the firm’s focus on valuation discipline over growth narratives.

J.P. Morgan’s Dubravko Lakos-Bujas, Head of Global Markets Strategy, notes: “The central equity theme for next year is one of higher dispersion across stocks, styles, sectors, countries and themes. This should improve the opportunity set and provide a healthier backdrop for the active management industry.”

Bank of America’s five-year dividend compound annual growth rate of 6.4% exceeds JPMorgan’s 5.8%, indicating stronger recent commitment to shareholder returns. This metric supports the bank’s appeal to income-focused investors despite the rating adjustment.

Conclusion

The downgrades represent a strategic recalibration rather than fundamental concerns about banking sector health. Both JPMorgan and Bank of America maintain strong operational metrics and market positions.

Baird’s actions highlight the importance of valuation discipline in current market conditions. The firm’s preference for regional banks over mega-cap institutions signals a shift toward value-oriented positioning within the financial services sector.