The U.S. banking sector experienced a significant downturn on Friday, driven by concerns over artificial intelligence disruptions and rising credit risks. Shares of several major banks and investment firms declined sharply, reflecting growing investor anxiety about the economic outlook. Bank of America fell more than 4%, while Citigroup and Wells Fargo both closed down over 5%. Morgan Stanley dropped more than 6%, and Goldman Sachs declined over 7%. JPMorgan Chase, the largest U.S. bank, fell 1.9%. The KBW Bank Index ETF, which tracks the performance of the banking sector, dropped 4.95%, marking its largest single-day decline since the tariff-related turmoil in April of last year. Since large banks are often viewed as indicators of economic health, the sector's weakness has raised concerns about the broader economy.
Recent negative expectations surrounding artificial intelligence have continued to unsettle the market. Payment company Block announced a 40% reduction in its workforce due to efficiency improvements from AI, intensifying investor fears that technological advances could lead to widespread job losses. A report released earlier this week, highlighting the potential profound impact of AI on the economy and employment, further amplified market unease.
At the same time, rising credit risks have added pressure on financial stocks. Consumer finance institutions, which are more sensitive to economic cycles, performed particularly poorly. American Express, Capital One, and Synchrony Financial were among the biggest decliners. Turbulence in the private credit sector has also unsettled investors. Following losses in several prominent loans last year, redemption requests for related investment vehicles have increased. On Friday, two publicly traded private credit funds announced dividend cuts, heightening concerns about potential bad debt.
The collapse of U.K. financing firm Market Financial Solutions served as the latest warning. The company provided bridge loans to real estate developers and high-net-worth clients, but recent investment vehicles failed to receive expected payments, with two already entering bankruptcy proceedings. Market participants worry that institutions financing these vehicles may face collateral risks. Shares of Jefferies fell more than 9%, while Barclays declined around 4%.
According to Ebrahim Poonawala, an analyst at Bank of America Merrill Lynch, weakness in technology stocks and tightening credit conditions could undermine the previously anticipated recovery in mergers and acquisitions as well as IPO markets. He noted that while market sentiment was relatively optimistic at the beginning of the year, investors are now confronting risks that were not fully priced in, leading to a spread of panic.
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