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 while the S&P 500 was down 1.9%. The selloff hit the nation's largest consumer banks, including Bank of America (down 6%), Wells Fargo (down 5.9%), and JPMorgan (down 4.5%).

"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%.

"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 on [other delinquencies] 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.'"

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. Tariffs are expected to raise prices for Americans businesses and consumers.

"What really drives massive changes in sentiment for bank stocks specifically is changing balance sheet quality," she 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 -- and 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 6% and Stifel Financial dropped 4.5%. 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 a more robust M&A activity. But a slowing economy might dash those hopes.

Brokerage and wealth management companies also tumbled Tuesday morning. Robinhood Markets and Interactive Brokers were down 7.3% and 6%, respectively. Shares of both companies have been outperforming their peers for the past year. Robinhood's stock is up 172% over the past 12 months while Interactive Brokers is up 72%.

Shares of Charles Schwab also fell Tuesday, tumbling 4%. 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.

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

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March 04, 2025 11:17 ET (16:17 GMT)

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