After a rip-roaring rally yesterday, stocks resumed their sell-off today, as unrest about tariffs and U.S.-Chinese relations once again found the spotlight. The Dow Jones Industrial Average traded more than 1,100 points down in the final half-hour of trading, while the broader benchmark S&P 500 had fallen close to 3.8%.
Large bank stocks also slid as the group prepared to kick off first-quarter earnings season tomorrow morning. Shares of JPMorgan Chase (JPM -3.08%) traded roughly 4% lower. Shares of Bank of America (BAC -3.66%) and Wells Fargo (WFC -5.00%) had fallen roughly 4.6% and 5.7%, respectively.
The shock and awe of Trump's tariff pause yesterday seemed to make investors forget their troubles, close their short positions, and buy stocks like there's no tomorrow. But once investors regrouped this morning, they seemed to remember that significant tariffs, including 25% levies on steel, aluminum, and automobiles and a base 10% level of tariffs on most countries, are still in place.
Furthermore, Trump left tariffs on China in place and actually raised them to 145%, setting up a trade showdown between the two countries over the next 90 days. Meanwhile, a Chinese Foreign Ministry spokesperson this morning said that while the country is not looking for a trade war, it will also not back down if tariffs bring one to fruition.
Tariffs have led economists and analysts to lower their expectations for U.S. growth, and banks live and die with the economy, at least in the near term. JPMorgan Chase and Wells Fargo will formally kick off earnings season tomorrow morning, with Bank of America scheduled to report next Tuesday. Analysts at Morgan Stanley issued an earnings preview this morning, revising their view on large- and mid-cap bank stocks from attractive to in line.
"Trade developments move our base case to a significant gross domestic product slowdown, with risk of our bear case recession scenario rising sharply," Morgan Stanley analyst Betsy Graseck said in her note. Furthermore, Graseck said that investment banking revenues have the "fastest-twitch response within the financials sector to recession risk and deteriorating market conditions" and will be impacted more quickly than loan growth.
JPMorgan and Bank of America are more highly exposed to investment banking, while Wells Fargo is much less geographically diverse and focused more in the U.S.
Given everything that's occurred over the last week, more investors will be watching bank earnings than normal, looking for clues about the economy, although the larger effect from tariffs has yet to be felt.
I'm not exactly sure what to expect tomorrow. I'm less worried about the results and more interested in guidance. Morgan Stanley expects management teams to trim guidance, given the outlook for investment banking and wealth management. However, if banks can somehow hold guidance or bring it down less than expected, shares could get a bounce.
Valuations have come down significantly this year, particularly at Bank of America, which now trades at only 133% of its tangible book value and is starting to look attractive. I don't think any of these stocks are bad picks long term, but I do think they could continue to take a hit in the near term as investors remain uncertain about the trajectory of the economy.
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