Trump’s tariffs roil bank stocks, but lenders stay calm

The plunge in bank stocks over the past several weeks developed amid mounting fallout from President Trump’s tariff policies, festering inflation worries and the growing specter of a recession.

The KBW Bank Index, while rising on Friday, was still down about 15% from its 2025 peak on Feb. 6. That was just before the president’s tariff threats evolved into nascent trade wars with China, Mexico, Canada and the European Union.

The extent of Trump’s levies, as well as their duration, have shifted substantially in recent weeks, creating confusion for some business leaders trying to chart courses for capital spending and hiring.

Tariffs, which are typically paid by importers, raise worry that the increased costs of bringing products into the U.S. will get passed onto consumers and reignite inflation that is already stubbornly high. This could tilt the economy into a recession, spur loan defaults and stunt banks’ growth.

“The uncertainty surrounding these tariffs and potential retaliations … remains the biggest economic risk moving forward,” said Larry Adam, Raymond James’ chief investment officer.

Is the market overreacting? Some investors — and bankers — believe Trump is using tariffs as short-term negotiation tactics to elicit trade concessions that will favor the U.S. 

For example, Raymond James’ forecasting team still expects the U.S. economy to expand this year, at around a 2% pace, though growth could prove choppy.

In addition, several bankers who spoke at the RBC Capital Markets Financial Institutions Conference this month said some of their commercial clients were optimistic about the prospects for Trump’s trade strategy. They argued manufacturers could build more of their supply chains domestically, become less reliant on complex global trade and avert costs created by tariffs.

“We’ve had some clients that are in the materials handling business domestically, and they’ve expanded product lines,” said Brian Willman, head of corporate banking at the $157 billion-asset Regions Financial in Birmingham, Alabama.

Daryl Bible, chief financial officer at Buffalo, New York-based M&T Bank Corp., shared a similar message.

“We surveyed about 500 to 600 of our customers and said, ‘What impacts would tariffs have on you?’ And 17% came back and said they could potentially have a negative impact with tariffs; didn’t say they were having it, but there’s a possibility,” Bible said of the responses from the $208 billion-asset’s bank’s commercial customers. “There’s also a group out there that actually says they will benefit from tariffs. It’s not just one side. It goes both ways.”

Providence, Rhode Island-based Citizens Financial Group surveyed more than 500 middle-market companies in February as the tariff worries began to bubble up and found the majority of them still expected to invest in growth and continue hiring in 2025.

Some 56% of middle-market business leaders said their companies would hire more this year, and only 10% projected job cuts, according to the survey.

“Business leaders came into the year with a generally upbeat feeling about the economy, and that sentiment remains, despite macroeconomic volatility,” said Don McCree, head of commercial banking at the $217.5 billion-asset Citizens.

Still, inflation was the top concern for business leaders surveyed by Citizens, at 59%. Respondents also identified high interest rates (44%), tariffs (42%), financial market volatility (39%) and a possible recession (34%) as the greatest risks to their companies’ financial performance in 2025.

One reason for concern is that all of those risks are interconnected. The federal consumer price index, a key gauge of inflation, edged lower in February — to 2.8% from 3.0% in January. But it was still well above the Federal Reserve’s target of 2%. Tariffs threaten to push the reading back up in March.

Meanwhile, even though the Fed lowered its benchmark interest rate by 100 basis points last year, rates remain elevated, adding to the uncertainty. The Fed could further lower rates to encourage borrowing and spending in the face of recession risk. But it could also hike them to tamp down spending and ward off another surge in inflation like the one that emerged in 2022 following the pandemic and Russia’s invasion of Ukraine. Inflation peaked at 9.1% that year.

The unknowns have captured investors’ collective attention. Banks, because of their exposure to potential economic weakness, are in the heart of a market storm, analysts said this week.

Goldman Sachs Chief U.S. Economist David Mericle said during a webinar that he expects the average tariff rate to increase by 10 percentage points or more. This is likely to result in higher U.S. consumer prices, he said.

“I would say at the very least this is something to keep an eye on — the risk of the tariffs sparking broader price increases,” Mericle said.

Goldman Sachs has cut its 2025 economic growth forecast from 2.2% to 1.7%. “The uncertainty that tariffs introduced are probably going to have a larger effect, discouraging business investment,” Mericle said.