By Paul R. La Monica
The shellacking that big bank stocks have taken as of late could be an ominous sign about what's next for the economy. Or not. It will all depend on how much worse the private-credit problems get for major financials. The sector bears watching, but it may not be time to ring recession alarm bells just yet.
That's the conclusion of Nicholas Colas, co-founder of DataTrek Research.
Colas wrote in a report Wednesday that "worries over private credit are expanding by the week." He noted that concerns have gone from "the dodgy nature of some of the issuers" (think Tricolor and First Brands) to worries about heavily indebted private software companies that could be disrupted by artificial intelligence.
And now, the latest oil price spike due to the conflict in Iran means that investors (and banks) have to be nervous about "highly indebted, economically sensitive companies" and what is looking like an "increasingly crowded and ever more fretful basket."
These fears have rocked the top banks, with shares of JPMorgan Chase, Bank of America, Goldman Sachs, Wells Fargo, Morgan Stanley and Citigroup all tumbling between 8% and 18% this year. The damage has been even worse for the likes of alternative asset managers such as Blackstone, KKR and Apollo Global Management.
But here's why Colas isn't too nervous yet. He points out that the State Street SPDR S&P Bank ETF, which tracks the S&P Banks Select Industry Index, is still outperforming the S&P 500 over the past 100 days, despite the recent weakness. The bank stocks are up 2.2%, while the broader market has essentially been flat.
"Bank stocks do not currently signal any truly damaging spillover from the problems in private credit or higher oil prices into the US economy, " Colas wrote. "Yes, they have experienced some underperformance over the last month, but that will have to get much worse before this group sends out a broader 'sell' signal."
With that in mind, the recent bank stock slide may not be a sign of a recession just yet. "We remain bullish but will be monitoring bank stocks closely," Colas wrote.
But the weakness for financials may turn out to be more like 2023, when several regional bank failures raised recession concerns but ultimately did not lead to an economic downturn, as opposed to the Global Financial Crisis of 2008 or the brief Covid recession in 2020.
That doesn't mean investors should ignore the current pullback entirely, though.
"US bank stocks are a useful coalmine canary, providing a market-based warning about serious problems in the US economy and/or financial system, " Colas wrote.
"Their performance can give off a false positive in terms of looming recession (i.e., 2023), but they do always suffer statistically terrible performance right at the start of every economic downturn," he added.
Others are bullish on banks, too. Jose Rasco, chief investment officer of the Americas for HSBC, told Barron's his firm continues to be overweight on financial stocks. He said the fundamentals for the top banks still look healthy and that he expects more consolidation among smaller regional banks, which could boost valuations across the sector.
Steve Sosnick, chief strategist for Interactive Brokers, also noted that regional bank stocks have been holding up better than the larger Wall Street firms as of late -- an encouraging sign.
"Regional banks are not going to be exposed to private equity in same way," he said in an interview, adding that there could be a "flight to safety mindset" that will help regional banks.
Still, investors should keep a close eye on bank stocks. Colas says they are "now the most important equities to watch" even more than tech or oil stocks.
"If they continue to underperform as badly as they have over the last month, it will mean that investors have started to give up on the paradigm of an ever-resilient US economy," he said.
For now, though, the weakness in bank stocks looks more like a temporary dislocation for some of the big banks and not a harbinger of economic doom and gloom.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 18, 2026 11:50 ET (15:50 GMT)
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