By Andrew Welsch

Shares of Wells Fargo, Morgan Stanley, Robinhood Markets and other financial companies sold off alongside a broader decline in equities Tuesday.

Investors appear to be weighing not just the impact of tariffs but concerns about a broader economic slowdown, which could crimp demand for loans and other banking services and products.

The KBW Nasdaq Bank Index had fallen 6% by late morning Tuesday, before paring some of its losses. The index was down 4% while the S&P 500 was down 0.75% in mid-afternoon.

"The market is always forward thinking," Najarian says. "If the economy slows down to the point where you have greater delinquencies, such as greater credit card delinquencies, and [other delinquencies] on the corporate side, that's not good for bank stocks. In my opinion, you don't see a selloff this acute if it's just 'oh loan growth is going to be delayed.'"

The selloff hit the nation's largest consumer banks, including Bank of America (down 5.4%), Wells Fargo (down 4.2%), and JPMorgan (down 3.4%).

"I think the implementation of tariffs is scaring the market about prospects for growth in 2025," says UBS analyst Erika Najarian.

The Federal Reserve Bank of Atlanta's forecast for first-quarter gross domestic product, GDPNow, calls for a decline of 2.8%. As recently as Feb. 19, GDPNow predicted growth of 2.3%. President Trump's tariffs now affect $1.4 trillion of imports, Erica York, vice president of federal tax policy at the Tax Foundation's Center for Federal Tax Policy, posted on X, formerly known as Twitter. That's more than three times the figure from his first term.

Economists have warned that tariff costs will be passed on to consumers, and some businesses have signaled that they intend to raise prices. Target CEO Brian Cornell said Tuesday the retailer will hike prices and consumers could see increases soon.

The tariffs land just as consumer sentiment has recently turned sour. The University of Michigan's survey of consumers dropped to its lowest reading since July 2024. Consumers' expectations of inflation for the year ahead rose to 4.3% from 3.3% in January. And that was before tariffs on imports from Canada, Mexico, and China went into effect.

"What really drives massive changes in sentiment for bank stocks specifically is changing balance sheet quality," UBS' Najarian says. "A slowdown in activity levels is one thing, but if there is a slowdown in the economy that brings up the R word -- recession -- that could lead to potential portfolio quality deterioration. Portfolio managers detest that when it comes to bank stocks."

Companies with large investment banking units also took a hit Tuesday. Morgan Stanley fell 4.6% and Stifel Financial dropped 3.4%. Investment banking was a bright spot late last year and provided a revenue boost for financial companies after several years of anemic activity. Investment bankers have been hoping for proverbial "green shoots," which would indicate a return to more robust M&A activity. But a slowing economy might dash those hopes.

"Financials are one of the worst performing sectors this month primarily due to concerns about the weakening economy given the poor readings we have seen from the consumer, manufacturing, and housing over the past week, as well as a classic risk-off trade," Cetera Financial Group CIO Gene Goldman says. "The former is consistent with a slowing economy that likely reduces loan demand and may also increase bank loan loss reserves. The latter is not surprising as, during periods of market uncertainty and risk-off moments, investors tend to punish those sectors that have appreciated the most or are higher beta (more aggressive). Over the past 12 months, the financials sector was the best performing sector (after utilities)."

Brokerage and wealth management companies also tumbled Tuesday. Shares of Robinhood Markets plunged as much as 10% in the morning before paring its losses in the afternoon. The brokerage firm's stock was down 1.4%. Interactive Brokers shares fell more than 7% before bouncing back; the stock was down 2.3% as of mid-afternoon. Shares of both companies have been outperforming their peers for the past year. Robinhood's stock is up 189% over the past 12 months while Interactive Brokers is up 79%.

Shares of Charles Schwab also fell Tuesday, sliding 2.3%. The company is one of the nation's largest wealth managers, overseeing more than $10 trillion on behalf of millions of retail investors and thousands of independent financial advisors.

Cetera's Goldman says that despite the banking sector's weakness it remains a favorite because it could benefit from a combination of deregulation and higher for longer interest rates. The latter should benefit net interest margin, a key profit metric for banks.

Philip Palumbo, CEO and chief investment officer of Palumbo Wealth Management, agrees that deregulation could be beneficial for banks and the economy. "I think the smoke can clear and we can be off to the races, but we could be in for some pain in the short term," Palumbo says. He is paying close attention to monthly jobs data to get a read on what's in store for the long term.

"If job figures get weak and the consumer is tapped out, then that is a big problem," he says.

Write to Andrew Welsch at andrew.welsch@barrons.com

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March 04, 2025 14:24 ET (19:24 GMT)

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