President Donald Trump’s latest wave of tariffs is rattling more than just the manufacturing sector.
US banks and wealth management firms – though not directly exposed to the levies – are feeling the pressure through shrinking margins, nervous investors, and souring economic forecasts.
Financial stocks tumbled sharply after the tariff announcement Wednesday. The KBW Nasdaq Bank Index fell nearly 10 percent on Thursday, its worst one-day performance since March 2023, when Silicon Valley Bank collapsed.
"[Banks] aren’t in the direct line of fire for tariffs, but they make their living lending and doing business with all the companies that are in the line of fire," said John McDonald, bank analyst at Truist Securities. "The second-order impacts on consumers are critical for banks as well."
Meanwhile, wealth management stocks including Robinhood, Schwab and Morgan Stanley continued to plunge on Friday amid broad concerns about a slowing economy.
The declines in financial firms' shares after Trump's "Liberation Day" announcement were much more acute than in early March, when the president's initial tariff threats against Canada, Mexico, and China led to comparatively muted drops in the low to mid-single digits.
As noted by the Wall Street Journal, the financial sector’s vulnerability lies in what happens next. If tariffs fuel a recession or even stall economic growth, bank revenue could fall significantly. Loan demand would drop, credit losses could rise, and borrowers – both consumers and businesses – might struggle to repay debt.
Major lenders already face exposure to consumer credit risk. Average household credit card balances have reached multi-year highs, and some consumers are falling behind on payments. Higher prices on imported goods could stretch household budgets even further, raising the likelihood of missed payments.
In addition, banks operate under accounting rules that require them to project credit losses over the full life of a loan. That means early signs of economic strain often lead to loan-loss provisions before real defaults occur – cutting into earnings well ahead of actual delinquencies.
For companies, the picture isn’t much brighter. Even if firms pass tariff costs on to consumers, slower revenue growth could lead to reduced borrowing and cautious corporate spending. A pullback in mergers, public listings and capital investments would deal a blow to banks’ dealmaking fees, which have been a bright spot for Wall Street.
A flattening yield curve adds to the pressure. If long-term rates fall due to weak growth while short-term rates stay high due to persistent inflation, net interest margins would shrink.
Wealth management firms are being battered as well. As Barron's reported, Robinhood’s shares slid by as much as 13.8 percent on Friday, following Thursday’s decline. Schwab and Interactive Brokers plunged as deep as 8 and 9 percent, respectively, while Morgan Stanley, which owns online broker E*Trade, dropped 9 percent.
"Market volatility will lead to an initial surge in trading; however, selloffs eventually lead to lower trading volumes and less assets under management," said Gene Goldman, chief investment officer at Cetera Financial Group. "Less assets under management equates to lower fee revenue."
Wealth firms today earn most of their revenue from asset-based fees rather than trade commissions, which one recent Cerulli report estimates have declined to represent 23 percent of the average advisor's revenue. A prolonged downturn in equity markets could severely compress top-line performance. Lower asset values also reduce client confidence and future contributions to investment accounts.
Investment banking hopes are dimming too. When business owners sell companies or take them public, they often reinvest the proceeds with wealth managers. But the forecast for dealmaking has turned cloudy, dragging down firms like Stifel Financial, LPL Financial and Raymond James – each of which saw share prices fall between 6 and 12 percent this week.
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