Trump's Tariffs Roil Bank Stocks, But Lenders Stay Calm

The banking sector has been on a rollercoaster ride in recent years, with interest rate policies and economic uncertainties driving significant volatility. As of March 15, 2025, the Federal Reserve's change in interest-rate policy has led to a mixed performance for bank stocks. While the KBW Nasdaq Bank Index and the KBW Nasdaq Regional Banking Index have shown resilience, the recent flattening of the yield curve has raised concerns about the future of bank profitability.



The yield curve, which measures the difference between short-term and long-term interest rates, has been a critical indicator for bank performance. During 2023 and most of 2024, the yield curve was inverted, meaning short-term rates were higher than long-term rates. This inversion squeezed bank margins, as they paid high rates for deposits while earning less on loans. However, the Federal Reserve's rate cuts in September 2024 normalized the yield curve, with long-term rates climbing higher than short-term rates. This normalization was a positive sign for banks, as it indicated a more favorable interest-rate environment.

Despite this normalization, the yield curve has recently flattened, with the 10-year Treasury yield at 4.31% and the 3-month yield at 4.30%. This flattening suggests that investors are loading up on long-term Treasury securities, anticipating an economic contraction or slowdown that could force the Fed to make additional rate cuts. The Federal Reserve Bank of Atlanta's GLP Now model on March 6 indicated a contraction for the U.S. economy at an annual rate of 2.4% for the first quarter of 2025, adding to the uncertainty.

The banking sector's performance has also been influenced by the Trump administration's tariff policies. The implementation of tariffs on Chinese goods in 2018 led to a 20% drop in the S&P 500, and it took 18 months for the market to recover. This volatility has affected the profitability of banks, especially those with significant exposure to the stock market. For example, Goldman Sachs Research estimates that every five-percentage-point increase in the U.S. tariff rate could reduce S&P 500 earnings per share by roughly 1-2%. This reduction in earnings per share can squeeze profit margins for banks that rely on investment banking activities.

To mitigate these risks, banks are taking several measures. For instance, JPMorgan Chase & Co. is focusing on gaining wallet share from competitors in several areas and benefiting from a rebound in investment banking. Kenneth Leon, an analyst, notes that JPMorgan will benefit from less global competition for debt underwriting, initial public offerings, equity secondaries, and merger and acquisition advisory fees. This diversification strategy helps JPMorgan to offset the negative impacts of tariffs on its profitability.

Similarly, Bank of America Corp. is positioning itself to benefit from pro-business policies that could lead to a surge in capital markets and investment banking activity in 2025. Analyst Kenneth Leon projects solid loan volume growth and a stable U.S. economy, which could help Bank of America exceed consensus expectations for both net interest income and investment banking revenue. This proactive approach allows Bank of America to navigate the challenges posed by tariffs more effectively.

Additionally, banks are also focusing on operational efficiency and regulatory compliance. For example, Wells Fargo & Co. has been working on improving its operational efficiency and resolving regulatory issues under the leadership of CEO Charles Scharf. The potential removal of the $1.95 trillion punitive asset cap in 2025 could boost Wells Fargo's reputation and lead to improved deposit and loan growth, thereby mitigating the risks associated with tariffs.

In summary, Trump's tariffs have roiled bank stocks by increasing market volatility and affecting their international operations. However, banks are adopting long-term strategies such as diversification, operational efficiency, and regulatory compliance to navigate these challenges effectively. Despite the uncertainties, the banking sector remains resilient, with many banks poised to benefit from a rebound in investment banking and a stable economic environment.