NEW YORK (
) -- Bank stocks are 10% to 15% overvalued and will underperform the broader market "over the next several years," according to a well-known fund manager.
Richard Bernstein, head of his own advisory firm who also runs the Richard Bernstein Multi-Market Equity Strategy Fund for Eaton Vance, argues global U.S. banks like
Bank of America
could soon get pushed by policymakers to focus on domestic lending in order to stimulate the economy, hurting profits.
"Traditional domestic lending businesses are generally slower growing than highly-levered global trading or M&A advising,"
Bernstein argues analysts are looking for earnings growth of 10% from U.S. global financial companies--where he believes 6% to 8% growth is "more realistic."
Bernstein, a longtime Merrill Lynch strategist, cites a recent
with Treasury Secretary Tim Geithner in which the Treasury Secretary argued banks' interest and those of the U.S. economy are "not aligned," as evidence of shifting attitudes in Washington toward the banks. According to his argument, the banks used their TARP funds and other cheap government financing for trading and investment banking, rather than stimulating demand in the U.S., as policymakers had hoped.
That won't wash if the economy remains stagnant, Bernstein argues.
"Regardless of banks' global business strategies, Washington's policies must focus solely on lowering the cost of capital within the US and stimulating the domestic economy. Policymakers should only secondarily consider whether regulation enhances or detracts from US banks' franchises abroad."
If that mindset catches on in Washington, bank stocks will stagnate for years, Bernstein argues.
In what appeared to be a prelude to his article
Bernstein compared the big banks to tech giants
coming out of the tech bubble, noting the shares of the companies have been stagnant for a decade.
As the above chart demonstrates, financial stocks, as demonstrated by
Financial Select Sector SPDR
have lagged the Dow Jones Industrial Average by a wide margin so far this year, a trend Bernstein sees continuing for some time.
"History shows that stock market leaders during a bubble subsequently suffer an ignominious period of underperformance," Bernstein writes in his article, concluding "the political environment we foresee suggests that investors should expect continued underperformance over the next several years," he writes.
Written by Dan Freed in New York
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