Commonwealth Bank of Australia (ASX: CBA) shares have skyrocketed over the past couple of years, defying the forecasts of many analysts and investors.
CBA is Australia's largest bank. It is often perceived as a safe haven due to its superior capital position, relative to its peers. This makes its dividend more sustainable, a priority for many ASX investors after reliable passive income.
Leading broker Macquarie currently has a price target of $105 on CBA shares and an underweight rating. With CBA shares closing at $179 last Friday, this suggests that the bank is materially overvalued.
WAM Leaders portfolio manager Matthew Haupt believes that the National Australia Bank Ltd (ASX: NAB), ANZ Group Holdings Ltd (ASX: ANZ), and Westpac Banking Corp (ASX: WBC) share prices will trade sideways from here, while CBA is primed for a decline.
However, this isn't the first time that CBA shares have been labelled as overvalued. In fact, for the majority of the past couple of years, it's been hard to find a buy rating on CBA shares.
Yet, the big four bank has continued to defy expectations and charge higher. CBA shares are up 17% for the year to date and 43% over the past year.
Recently, the big four bank became the first ASX company to reach a market capitalisation of $300 billion. It is now the most expensive banking stock in the world, with a price-to-earnings (P/E) ratio above 30. By comparison, JP Morgan Chase (NYSE: JPM), which is widely considered to be America's highest-quality bank, is trading at a P/E ratio of around 13.
Image source: Getty Images
What could give?
The $300 billion question asks what could possibly bring CBA shares back down to earth.
In a recent article in The Australian, Investors Mutual portfolio manager Daniel Moore provided his perspective. Moore believes a macroeconomic event could cause an extensive sell-off.
In April, this happened to some degree when President Trump's 'Liberation Day' caused widespread market panic. CBA shares declined 8%. However, that fall was short-lived, with the bank recovering and setting a new all-time high.
WAM Leaders' Haupt believes the only way CBA shares will be brought back to earth is if flows move away from Australia and towards other markets, including the US and China.
When investors look into this region, they see CBA is a large weight, so it gets all the passive and index flows. So we just need flow dynamics to change, whether that's to Japan, China, India, the US or elsewhere, because Australia is seen as a bit of a safe territory at the moment, so money is flowing in here.
Where will the CBA share price be in a year's time? Only time will tell.
