BAC Bank of America Corporation

By Ben Eisen 

Shares of the largest U.S. lenders took a beating Tuesday, extending a slump that has kindled fears about the health of the economy.

The KBW Nasdaq index of 24 bank stocks fell more than 4.5% by midafternoon. Its losses over the last three months have exceeded 12%, double the fall in the broader S&P 500 index. Financial stocks were the worst-performing sector in the S&P 500 on Tuesday.

In afternoon trading, Morgan Stanley slid 5.3%; Bank of America Corp. sank 5.3%; Citigroup Inc. dropped 4.3%, and JPMorgan Chase & Co. fell 4.2%.

Goldman Sachs Group Inc., whose shares have struggled amid fallout from the bank's role in a Malaysian corruption scandal, was down 3.4%. The stock was poised to close at its lowest level in more than two years, nearly erasing a jump that followed the 2016 U.S. presidential election.

Bank stocks tend to reflect investors' expectations for the broader economy, because demand for bank loans can ebb and flow depending on economic strength.

Bank stocks benefited broadly after the election, when investors bet that banks would get a boost from accelerating U.S. economic growth, a deregulatory agenda championed by President Donald Trump and a windfall from corporate tax cuts. Bank profits got a big boost after the new tax law slashed the corporate tax rate late last year.

Now concerns are building around the strength of the economy, which has shown signs of shifting into a lower gear. Most private economists now expect U.S. economic growth to slow in 2019 as the tax-cut stimulus wears off, the Federal Reserve keeps raising interest rates and trade tensions between the U.S. and China continue to reverberate.

The rise in short-term rates relative to long-term rates also threatens to crimp the margins banks earn from borrowing at a low short-term rate and lending at a higher long-term one.

Banks are starting to pay more interest on the money depositors hold in their accounts. Meanwhile, higher benchmark rates in the U.S. have cut into banks' mortgage-lending businesses by choking off demand for refinancings.

Write to Ben Eisen at ben.eisen@wsj.com

(END) Dow Jones Newswires

December 04, 2018 15:15 ET (20:15 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.