Don’t Give Up on Bank Stocks Just Yet

US bank shares are in a bear market.i The KBW Bank Indexii fell 20% in 2018. That’s much worse than the overall stock market, which fell 6% in the same period. Ten years after the global financial crisis of 2007-2008, many investors are worried that this economic upturn can’t last much longer. Anxiety about the risk of a recession is high.

Bank share prices generally track bank earnings expectations over time. A sharp fall in bank shares can be a sign of an impending collapse in bank profits, as we saw early in the global financial crisis. On the other hand, a fall in bank stocks is not always a dire signal. For example, during the 2011 euro zone crisis and the 2015 energy market downturn, the pressure on bank earnings turned out to be modest and short-lived, and bank stocks rebounded. Which is it this time?