Banking stocks were taking a broad beating Friday as uncertainty about the health of the economy and an apparent lack of positive catalysts continue to give investors pause.
The Financial Select Sector SPDR exchange-traded fund
XLF
dropped 1.7% toward a seven-month low in afternoon trading, with 67 of 72 equity components losing ground. The ETF has shed 5.1% month to date and was headed for its first three-month losing streak since April 2022.
The SPDR S&P Bank ETF
KBE
slid 2.6% in afternoon trading and the SPDR S&P Regional Banking ETF
KRE
sank 2.7%, on pace for largest percent decline since Oct. 18, when it lost 2.72%.
The KBW Nasdaq Bank Index
BKX
was down 2.6% to $71.51. It’s on track to close at its lowest level since September 25, 2020, when it closed at $71.08, according to Dow Jones Market Data.
In comparison, the S&P 500
SPX
fell 0.4% while the Nasdaq Composite
COMP
rallied 0.4%.
Also read: S&P 500 on track to join Nasdaq in correction territory as stocks head for another weekly loss
JPMorgan analyst Vivek Juneja wrote that while the recent weakness in the sector may appear to have made valuations attractive, he recommended investors stay on the sidelines given “uncertainty about the economic outlook” and the implications of “higher for longer” interest rates.
Besides just uncertainty, “the sector is lacking a catalyst near term,” Juneja wrote in a note to clients, as commercial loans are weak, capital-markets issuance activity has slowed and the economic outlook is muddied by an election year.
Among the Financial Select Sector SPDR ETF’s more active components, shares of JPMorgan Chase & Co.
JPM,
sank 3.5%, the biggest one-day drop since they fell 3.8% on March 17. It was headed for the lowest close since May 31.
JPMorgan Chase said earlier that Chief Executive Jamie Dimon and his family plan to sell about $140 million worth of the bank’s stock “for financial diversification and tax-planning purposes.”
Elsewhere, Bank of America Corp.’s stock
BAC,
dropped 3.7%, also the biggest selloff since March 17. The stock was headed for the lowest close since Nov. 6, 2020.
Among the financial ETF’s other large banks, shares of Citigroup Inc.
C,
slid 2.5% toward a 3½-year low, shares of Wells Fargo & Co.
WFC,
dropped 2.1% and shares of Morgan Stanley declined 2% to a 2½-year low.
Regions Financial Corp.’s stock
RF,
slumped 2.8% toward the lowest close since Nov. 6, 2020, after Juneja cut his rating on the regional bank to neutral from buy and removed the stock from JPMorgan’s Analyst Focus List.
Juneja no longer sees a catalyst for Regions’ stock to outperform its peers, and he believes the bank will need to invest more in cybersecurity given the “surprising higher fraud costs” the bank saw for the last two quarters.
Banks are also wrapping up a mixed third quarter.
Timothy Coffey, an analyst who covers regional banks at Janney, said one common theme across the sector during this earnings season is that higher interest rates will weaken demand for loans.
“Almost every bank is reporting smaller loan pipelines (loans in application) not just year over year, but quarter over quarter,” Coffey said in an email to MarketWatch.
Steve Gelsi contributed.
Also read: Higher-for-longer interest rates challenge banks as mixed third-quarter earnings stack up
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