Yahoo Finance Federal Reserve coronavirus response pounds these stocks and raises recession signal
Bank stocks certainly haven’t gotten a pass during the two-week long or so rout in the markets. And thanks to the Federal Reserve’s surprise rate cut on Tuesday, the pain — and recessionary signals that comes with it — may be poised to persist.
Goldman Sachs strategists said earlier this week current bank valuations — which have taken a dive this year — are now discounting a 25% probability of a mild recessionary scenario in the U.S.
And with that yawning risk of a recession due mostly to the aftershocks of the coronavirus is the prospect for much lower profits for banks than Wall Street thinks. In short, it could be a brutal earnings reporting period for the banking sector come mid-April that won’t please already beaten up investors.
[Take our quick poll: Do you think the stock market has bottomed?]
The investment bank outlined four specific areas of concern for bank profits and the stocks moving forward: (1) lower interest rates; (2) lower loan growth; (3) downside risk to capital markets, in large part owing to the impact of the coronavirus; and (4) a dive in assets under management in wealth management outfits to reflect the recent market correction.
Goldman believes there is at least a 11% downside risk to current bank profit estimates.
Oddly, Goldman’s note didn’t get much play out there in a generally shell-shocked Wall Street community. That’s still surprising considering how far bank stocks have fallen lately and the signal that sends on the broader U.S. economy.
Bank stocks including Bank of America, JPMorgan Chase, Morgan Stanley, Goldman Sachs and Wells Fargo have plunged an average of 14% over the past month, per Yahoo Finance Premium data. The KBW Bank ETF has shed about 12% during that same stretch.
But now greater attention should be paid to what Goldman had to say on Monday.
The Federal Reserve slashed interest rates by 50 basis points in an emergency meeting Tuesday morning. The Fed said the “fundamentals of the U.S. economy remain strong” but that the coronavirus “poses evolving risks to economic activity.” The Fed’s latest action on rates will likely put even more pressure on bank profits — as they won’t be able to charge a great deal on loans — than estimated by Goldman just one day earlier. Moreover, the Fed’s surprise response hints a sharp slowdown in U.S. growth is well underway thanks to the coronavirus, which of course is bad news for the banks as well.
Reminds JPMorgan Chase strategist Michael Feroli, “When the Fed moves inter-meeting they usually follow up in the same direction at the next scheduled meeting, often by the same magnitude. However, if the Fed were to choose to cut 50bp at the next meeting we think they would rather just cut all the way down to 0%, which is a downside risk to our view.”
Not a surprise here: shares of Bank of America, JPMorgan Chase, Morgan Stanley, Goldman Sachs and Wells Fargo were all drilled following the news. At least someone is paying attention.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
Read the latest financial and business news from Yahoo Finance
Beyond Meat founder: things are going very well with McDonald’s
Starbucks CEO on what China has in store for the coffee giant
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
