Banks Confront Weakening Economic Data After Strong Run

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Banks in the U.S. have a lot going for them. But weakening economic data, underscored by surprisingly poor payroll numbers on Friday, is challenging the strong environment that’s coalesced around the sector.

Shares of the largest U.S. banks and regional lenders dropped Friday and underperformed the market after an employment report that fell far short of economists’ expectations raised concerns that the group would weaken in a slowing economy.

JPMorgan Chase , Bank of America , Citigroup , and Wells Fargo all fell between 2% and 3.5%, while the S&P 500 fell 1.6%. Regional lenders Truist Financial , Citizens Financial, M&T Bank, and Huntington Bancshares declined between 1.8% and 2.4%.

Investors have bought up bank stocks this year and pushed some to record highs as a favorable backdrop has taken shape. For one, a new guard of Trump-appointed financial watchdogs has been driving the biggest rollback to regulations since the 2007-09 financial crisis, which analysts say could drive profits higher.

Banks have counted win after win from regulators who are moving to make stress tests easier for them to navigate, ease capital requirements, and embrace more mergers and acquisitions.

Meanwhile, consumer spending—that great economic backbone—has generally held up well against a low unemployment rate. The heads of banks, asset managers, and payments companies have broadly echoed that view on calls with analysts and journalists in recent weeks.

Yet doubts about that resilience appeared to weigh on banks’ share prices Friday, and traders started to price in a higher likelihood that the Federal Reserve would cut interest rates in September instead of holding them steady.

Consumer banking businesses large and small do well when the economy and consumers—banks’ depositors, savers, and investors—do well.

A low unemployment rate, rising stock markets, and customers who feel confident in the economy translate to credit-card bills paid on time and larger investment and savings accounts. Banks can sell more products, grow fee revenue, and count on strong loan portfolios.

A combination of employers adding far fewer jobs than expected last month, and signs of slowing consumer spending—a point that Fed Chair Jerome Powell noted last week—present challenges for lenders. They are warning signs that investors in the space would be prudent to monitor—even as banks, particularly Wall Street firms, are poised to benefit from a much more relaxed set of guardrails.

Write to Rebecca Ungarino at rebecca.ungarino@barrons.com