Financial institution of Montreal (TSX:BMO) has been an investor’s dream thus far in 2025, delivering a complete return of about 28% yr so far. This outpaces the Canadian banking sector’s 23% return (as measured by the BMO Equal Weight Banks Index ETF) and the broader market’s 18% return (utilizing the iShares S&P/TSX 60 Index ETF as a benchmark).

BMO inventory is outperforming however how lengthy can it final?

There’s little doubt this yr is a yr of energy for BMO. Actually, its 10-year compound annual development fee (CAGR) from 2014 to 2024 stands at roughly 12%, a stable long-term return for a serious monetary establishment. However whereas this short-term momentum is spectacular, it additionally raises an essential query: Is the inventory overheating?

Traders should think about that durations of speedy development are sometimes adopted by stagnation or pullbacks. Simply because BMO is hovering right now doesn’t imply tomorrow’s returns will match. Those that soar in now danger shopping for close to the height of a efficiency cycle.

Timing issues: BMO’s roller-coaster experience because the pandemic

To focus on how timing can have an effect on your returns, think about this: BMO rallied roughly 140% between the COVID market backside in March 2020 and its peak in March 2022. That run was actually extraordinary. However what occurred after? From March 2022 to September 2024, the inventory delivered a unfavorable CAGR of about 5%.

This illustrates an essential reality — buyers are sometimes higher off shopping for high quality shares like BMO during times of underperformance, not when there’s a number of optimism. Whereas it’s straightforward to be swept up in right now’s bull run, historical past exhibits that future returns are likely to normalize — and typically disappoint — after a pointy rally.

Is BMO inventory costly proper now? All indicators level to “sure”

At round $174 per share, BMO now trades at a price-to-earnings (P/E) ratio of practically 15 — its highest valuation since 2010. Whereas some may argue that is justified by sturdy earnings (adjusted earnings per share (EPS) is up 14% yr so far), that development fee is much above the financial institution’s long-term norm. Over the previous decade, its adjusted EPS development fee was simply 3.9% as a result of three years of an -11% to -18% EPS drop.

For long-term shareholders who purchased at decrease ranges, BMO stays a stable, dividend-paying blue-chip. However for brand spanking new buyers? The present valuation seems wealthy. A pullback towards the $130–$146 vary would provide a way more cheap entry level with a greater margin of security.

Recession dangers and long-term resilience

Based in 1817, Financial institution of Montreal has turn out to be the seventh-largest financial institution in North America with $1.4 trillion in belongings and serving 13 million prospects globally. Its operations are well-diversified: 34% of income comes from Canadian private and industrial banking, 29% from U.S. private and industrial banking, 20% from capital markets, and 17% from wealth administration.

Nonetheless, BMO will not be recession-proof. Within the final two financial downturns — the 2020 pandemic and the 2008 monetary disaster — its inventory fell 37% and 60%, respectively, from peak to trough. The very best time to purchase BMO is commonly when concern is excessive, not when enthusiasm dominates.

Investor takeaway

For those who’re a momentum dealer, there may nonetheless be short-term positive factors forward. However for value-oriented buyers searching for long-term security and development, that is probably not the best time to purchase. Historical past is evident: BMO inventory performs finest when bought throughout instances of weak point, not energy.

In brief, it’s too late to purchase BMO shares proper now — but it surely’s price conserving in your watchlist for when the following downturn hits.