Michael Nagle/Bloomberg
Bank stocks are in a March slump, hampered by tariff policy confusion and related worries about economic recession.
The KBW Nasdaq Bank Index lost 4% on Monday and extended its slide Tuesday morning. This week’s drop followed a 9% plunge last week, the steepest one-week loss for the index since the start of 2025 and the fourth consecutive week of losses. The bank index was down more than 7% year to date as of early Tuesday. The broad S&P 500, for comparison, was down about 5%.
Investors are worried about fallout from President Donald Trump’s tariff campaign. He levied an additional 10% tariff on Chinese imports in February, while imposing 25% duties on Canada and Mexico early last week. A few days later, he postponed the bulk of the North American tariffs until early April. He also called for new tariffs on a swath of countries next month. The timelines for most of these are in flux.
“For much of January, as we got into the year, most of our customers were optimistic about lower taxes and deregulation,” said Chris Nichols, director of capital markets at SouthState Bank in Winter Haven, Florida. “Now they just don’t know what to think. It’s just become so unpredictable that hardly anybody is doing anything. And the general consensus is that it could go on and on like this. If it’s not tariffs, then it could be something else.”
The combination of uncertainty created by the on-again, off-again approach to foreign relations and the potential for tariffs to reignite inflation muddied the U.S. economic outlook and heightened worries that a downturn could result in soured loans and profit-crimping increases in credit costs, Nichols said.
It has already forced borrowers to tap the brakes on using their credit lines to invest in growth plans. “We now have no idea how to forecast,” Nichols said. “I think that makes the markets, and capital spending, a wild card. Banks, because of their leverage and exposure, are getting hit hard.”
Keefe, Bruyette & Woods analyst Christopher McGratty said investors are distancing themselves from stocks perceived to be vulnerable to a recession. “The recent risk-off trade extended an already fading sentiment for the banks,” he said in a note to clients.
Historically, hefty new duties on imports were passed along to consumers. Higher consumer prices spurred inflation, said Raymond James Chief Economist Eugenio J. Alemán.
“We are no fans of tariffs, as they create more harm than benefits,” Alemán said. “However, if we are going to impose tariffs, let’s do it and move on. These levels of uncertainty are not good for economic activity as they distort the decision-making process of businesses and also affect consumer behavior to the detriment of sustained economic growth.”
He echoed an American Bankers Association panel’s assessment late last week. The ABA forecasters said they were still anticipating modest economic growth this year, but they conceded a lack of confidence in that outlook because of tariffs.
The unknowns also cloud the outlook for Federal Reserve interest rate cuts. The Fed lowered rates modestly in the second half of 2024, but they remain elevated. The further reductions that investors had anticipated at the start of this year appear less likely.
What’s more, inflation crept up to 3.0% in January from 2.9% the prior month. It remained well above the Fed’s 2% target. The consumer price index for February, a measure of inflation, is scheduled for release on Wednesday morning.
Relatively high interest rates for a prolonged period would keep borrowing costs high and could dampen loan demand.
“All told, tariff headlines probably put us on pause for customer activity until policy questions settle,” Piper Sandler analyst Scott Siefers said in a report. He noted that consumer and business owner sentiment had been favorable at the start of 2025, and he remains “hopeful” that optimism will return once tariff questions get answered.
KBW’s McGratty also struck a cautiously optimistic tone. He said the March sell-off could create buying opportunities for oversold bank stocks. “We remain selectively constructive despite the now moving target on rates and a marginally higher probability of recession,” he said.
The Federal Reserve Bank of Atlanta’s forecasters were doubtful in the near term. They estimated last week that first-quarter gross domestic product would decline by 2.4%.
“All the noise from this game of ‘impose-it-impose-it-not,’ ‘delay-it-delay-it-not’ is highly detrimental to economic activity, and the first quarter of the year will probably remind us of just how detrimental it is,” Alemán said of the tariff challenges.
He is confident that, should the “heightened noise” around tariffs and inflation subside, “the economy is going to resume its expansionary path.”
But there is no end in sight yet.
“The administration is almost willing a recession into reality,” Nichols said. “They have created so much uncertainty that owners and CEOs are now reluctant to invest. While tariffs are bad, we could plan for them. Not knowing if we have tariffs or not and how long they will last for makes businesses reluctant to hire and expand.”
