What on earth’s going on with the Lloyds share price?

The Lloyds share price has surprised investors, including myself, in recent months. Investor sentiment’s gone through the roof, but should I stay invested?

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The Lloyds (LSE:LLOY) share price has boomed since February — it’s up almost 30%. But we’ve been here before. A year ago, Lloyds shares were trading well above 50p when the Silicon Valley Bank fiasco happened, and banking stocks plummeted.

So should I take my gains and cash out of Lloyds? I don’t think so. I think it’s a solid investment to buy and hold for the long run.

Not the bargain it once was

For the second half of 2023, Lloyds was clearly cheap as chips. The bank was outperforming its peers and has been protected against mass defaults by the relative wealth of its customers. According to Bloomberg, the average Lloyds mortgage customer earns £75,000 a year — far above the country’s average.

Interestingly, 2023 was a record year for Lloyds — even though the stock remained dirt cheap for most of it. Earnings in the first quarter of 2024 fell by 28% versus last year, highlighting how exceptional conditions were.

However, as investors, we don’t invest in today’s performance, we invest in how we think a company will perform in the medium and long run.

Lloyds isn’t trading at 4.5 times forward earnings — like it was at points last year. And the dividend yield’s no longer near 6%. That was an exceptional buying opportunity, in my opinion.

Now, finally, sentiment’s improving. The bank’s performance has been impressive through these lucrative yet dangerous times, and economic conditions appear to be improving.

Still a good offer

Lloyds stock isn’t on sale but at 9.5 times forward earnings, it’s still attractive. Moreover, analysts expect Lloyds’ earnings per share to steadily increase over the next three to five years — eventually reaching the heights achieved in 2023.

Earnings per share forecast
20245.8p
20257.1p
20268.5p

In turn, Lloyds’ valuation metrics have improved over time.

Price-to-earnings ratio
20249.5
20257.6
20266.5

Headwinds and Tailwinds

Investing in banking isn’t easy. These are cyclical stocks and they’re heavily impacted by broader economic conditions. The share price can rise or fall on a single piece of economic data.

As such, it’s worth highlighting that we’re not out of the woods yet with regard to inflation. It’s stubborn and interest rates could — I don’t think they will — stay at this very level for a long time. While you may think higher rates are good for banks, there reaches a stage where it harms their customers to the extent that the bank has to put more money aside to write off bad debt.

However, the prevailing consensus is that interest rates will start to come down soon — albeit slowly — and we’ll eventually reach the Goldilocks zone. This is where the economy is running along nicely and interest rates sit somewhere between 2.5% and 3.5%.

For context, we’ve rarely been in the Goldilocks zone over the past 20 years. It could be a boom time for banks.

The bottom line

If interest rates do moderate, if economic growth does pick up, this could be a really special time to own shares in UK banks. This is the most likely outcome, in my opinion. But one piece of economic data could put a spanner in the works.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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