Shares of major U.S. banks took a significant hit on Thursday, as Wall Street reacted sharply to President Donald Trump’s announcement of sweeping new tariffs. The tariffs, which economists warn could stifle economic growth and fuel inflationary pressures, sent shockwaves through the financial sector, with bank stocks plunging across the board.
The KBW Nasdaq Bank Index (BKX), a key benchmark for the banking sector, dropped more than 8% in recent trading. This marks one of the index’s worst days since the regional banking crisis of March 2023, when the collapse of Silicon Valley Bank and Signature Bank sent shockwaves through the financial markets, contributing to an 11% plunge for the index. The latest sell-off reflects mounting concerns about the broader economic impact of the tariffs and their potential to derail the recovery.
Among the hardest-hit stocks were those of regional banks like Western Alliance (WAL) and Zions Bancorp (ZION), which both saw their share prices tumble by double digits. On the larger end of the spectrum, Citigroup (C) and Bank of America (BAC) were down 10% and 9%, respectively. Even industry giants like JPMorgan Chase (JPM), the world’s largest bank by market capitalization, saw a 6% decline in its stock price. Investment banks such as Goldman Sachs (GS) and Morgan Stanley (MS) fared no better, with their shares dropping more than 7%.
How Tariffs Could Affect the Banking Sector
While banks are not directly targeted by the new tariffs, their fortunes are closely tied to the broader health of the economy. The financial services industry thrives when businesses and consumers are actively borrowing, investing, and spending. When tariffs drive up costs and dampen economic activity, the ripple effect can undermine the banking sector’s performance.
Economists have expressed growing concerns that the newly announced tariffs could push the U.S. economy into a period of stagflation—a combination of stagnation and inflation. By raising the cost of imported goods and reducing global demand for U.S. exports, these tariffs could lead to slower economic growth, lower investment, and reduced consumer spending. If this happens, banks could see a decline in loan growth, investment banking activity, and overall business revenue.
As tariffs hike prices, businesses may pull back on investment, leading to slower economic activity and higher borrowing costs. This can lead to a tightening of financial conditions, which banks, especially those with exposure to consumer lending, could feel acutely. With fewer loans being issued and increased uncertainty, the profitability of banks could be severely impacted.
A Bleaker Economic Outlook
Economists have been warning that the impact of these tariffs could go beyond the immediate effects of higher prices. A report from Deutsche Bank, released Wednesday, predicted that the tariffs could subtract between 1% to 1.5% from U.S. GDP growth in the near term, further raising the risk of a recession. The tariffs would also likely increase the core inflation rate by a similar margin, adding another layer of complexity to the Federal Reserve’s task of curbing inflation.
The central bank has been focused on bringing inflation back down to its 2% target, but the new tariffs could make that goal even harder to achieve without triggering a recession. Higher inflation would reduce the purchasing power of consumers, further suppressing demand. At the same time, higher costs for businesses could squeeze profit margins, leading to cutbacks in hiring, investment, and production. These factors could, in turn, undermine bank earnings, which are closely tied to consumer spending and business growth.
Banks on the Frontline of Economic Tension
The recent slump in bank stocks highlights the broader vulnerability of financial institutions to the economic fallout from trade policies. While banks themselves may not directly face tariffs, their performance is deeply interconnected with the overall economic environment. When economic growth slows and inflation rises, the banking sector is likely to feel the pressure, whether it’s through weaker loan growth, lower consumer demand, or reduced trading activity.
This new set of tariffs—potentially the most significant in a century—adds another layer of complexity to an already fragile economic landscape. The risks of a recession are now top of mind for many investors, and the banking sector is particularly exposed. As companies and consumers react to the higher costs imposed by the tariffs, it’s possible that banks will experience a slowdown in loan growth, higher credit defaults, and lower demand for financial services.
What’s Next for Banks?
The immediate future for U.S. banks looks uncertain. With tariffs set to drive up costs for consumers and businesses, banks may face a tough road ahead. The rising risks of a recession and the potential for stagflation make it even harder for the Federal Reserve to navigate the delicate balance between controlling inflation and supporting economic growth.
In the short term, investors may remain wary of the banking sector, especially those with heavy exposure to consumer lending and investment banking. Banks that are heavily reliant on consumer spending and business investment will likely be more vulnerable to the effects of the new tariffs. On the other hand, banks with more diversified portfolios, including those with strong deposit bases and low exposure to trade-sensitive industries, may weather the storm more effectively.
In conclusion, the combination of higher tariffs, reduced consumer spending, and lower economic growth poses a significant risk to the banking sector. While the direct impact on banks may not be immediately apparent, the broader economic fallout from these tariffs could reduce overall demand for financial services and push the economy closer to a recession. Investors will be closely watching for any further signals from the Federal Reserve, as well as the unfolding economic data, to gauge how deeply these tariffs could affect the broader financial landscape.
