A Closer Look at Bank Stocks & Tariff Worries
If you didn’t know how banks made money, you would be justified in assuming that their business must be really exposed to tariffs. That will be a logical interpretation of bank stock performance in the ongoing tariff-induced market turmoil.
The chart below shows the performance of JPMorgan JPM, Wells Fargo WFC, Bank of America BAC, and Morgan Stanely MS relative to the S&P 500 index since February 19th. Two of these three banks are on deck to kick off the 2025 Q1 reporting cycle for the Finance sector by reporting their results before the market’s open on Friday, April 11th.
Image Source: Zacks Investment Research
We all know that the banking business isn’t subject to tariffs. But as cyclical operators, their business is heavily exposed to trends in the broader economy, which in turn is seen as weighed down by the ongoing tariffs uncertainty.
There is no denying that risks to the broader economic outlook have increased, with many economists raising their recession odds and lowering their GDP growth expectations. Simply looking at the chart above, which shows the performance of these bank stocks since February 19th, makes it clear that market participants see the going getting more challenging for these banks.
We intuitively understand this as the demand for credit decreases in a softening economic environment. At the same time, the quality of the bank’s assets suffers, as a portion of its existing borrowers are unable to pay back their loans.
Monthly loan volume data from the Federal Reserve has been showing a modest acceleration in loan demand in the first three months of the year, with commercial and industrial (C&I) loans and home-equity loans modestly up. The overriding issue for bank stock investors, however, is whether these trends can be sustained in the current macroeconomic environment. The stock market performance of these bank stocks suggests that they aren’t hopeful on that count.
With respect to credit quality, the problems in the commercial real estate (CRE) market are well-known and already adequately provisioned for at the major banks. Beyond CRE, aggregate bankruptcies in the U.S. have risen significantly from the Covid-driven low of early 2022, but the growth rate has been leveling off in recent months. We see this trend in early-stage credit card delinquencies as well, with the flat year-over-year growth rates in recent months indicative of favorable developments with respect to net charge-off rates this year.
As with loan demand, the key question on the credit quality front will be expectations for the coming periods in a macroeconomic backdrop that is at best showing moderating growth, if not an altogether recessionary downturn.