Not surprisingly, the stock market was having a rather weak day on Tuesday, after President Trump's tariffs went into effect on Canada, Mexico, and China. As of 12:15 p.m. ET, all major indexes were lower, and the S&P 500 (^GSPC -1.24%) was down by about 1.3% for the day.

Some sectors and industries were hit harder than others. While certain areas of the market are clearly tariff-sensitive, such as automakers, there are others that could be indirectly impacted. The financial sector is one big example of this, and many bank stocks were dramatically underperforming the market.

To name a few examples, megabank Bank of America (BAC -5.89%) was down by 6% for the day. Investment banking leader Goldman Sachs (GS -4.35%) had fallen by 5%. And app-based banking platform SoFi (SOFI -5.31%) was lower by more than 6.5%.

Why are bank stocks getting crushed by tariffs?

At first glance, you might think banks could get some positive tailwinds from tariffs. For example, generally higher prices of goods and services could result in higher spending volume. Plus, banks should see margins rise as interest rates fall, and over the past week, the median expectation has shifted from two Federal Reserve rate cuts in 2025 to three.

While these are positive factors, this is a case of the bad outweighing the good. First and foremost, tariffs could have the effect of causing consumer spending to plunge. Consumers are already feeling stretched after several years of high inflation, and if everyday goods and services cost more because of tariffs, it could force consumers to cut back. In fact, Target and Best Buy both said that tariffs are leading to consumer uncertainty and could weigh on their results for the first quarter.

For banks, this could mean falling demand for loans, as well as lower credit card spending. When it comes to investment banking, economic uncertainty can be a negative catalyst for things like M&A deals and IPOs.

Last but certainly not least, rising prices could not only hurt demand, but could cause an uptick in delinquencies and charge-offs if stretched consumers have trouble paying their bills.

What's next for banks?

Tariffs could prove to be inflationary and could slow economic activity down dramatically. And this could be bad news for the banks. To be sure, we have no idea how long the tariffs could remain in effect, but if they stick around, we could certainly see some pain in the financial sector.