Bank Stocks Suffer Worst Day Since April Despite Record Earnings as Policy Risks Mount

By most conventional measures, Wednesday should have been a triumphant day for America's largest banks. JPMorgan Chase beat earnings estimates. Bank of America topped expectations on both earnings and revenue. Citigroup delivered another quarter of progress on its turnaround. Yet when the closing bell rang, bank stocks had posted their worst session since April 2025.

The Numbers: Strong Earnings, Weak Stocks

The disconnect between fundamentals and stock performance was stark. Bank of America fell 3.8%, with shares down nearly 5% at their session lows—the largest single-day percentage decline since April. Wells Fargo dropped 4.6% despite reporting improved net interest income trends. Citigroup shed 3.3%. Even JPMorgan, which beat analyst expectations on both earnings and revenue, declined nearly 1%.

The selling came despite earnings that would have sparked celebration in almost any other context:

• Bank of America reported earnings of 98 cents per share versus 96 cents expected, with revenue of $28.53 billion exceeding the $27.94 billion consensus
• JPMorgan earned $5.23 per share on revenue of $46.77 billion, beating estimates of $5.00 per share on $46.2 billion in revenue
• Trading desks across Wall Street delivered exceptional results, with Goldman Sachs later reporting a record $4.31 billion quarter in equities trading

The Credit Card Bombshell

The proximate cause of the selloff was a proposal floated by the Trump administration to cap credit card interest rates at 10%. For banks that charge average APRs above 20% on revolving credit card balances, such a cap would devastate one of their most profitable business lines.

"Credit card lending is essentially a high-yield lending business embedded within consumer banking," explained one bank analyst who covers the sector. "A 10% cap would make the entire product category uneconomic for most issuers. You'd see banks exit the market or dramatically tighten underwriting standards."

The proposal remains conceptual—no legislation has been introduced, and significant legal questions surround executive authority to impose such a cap. But the mere suggestion was enough to trigger a repricing of bank stocks relative to their earnings power.

"It's all just a little too perfect in Bank-land. The market is telling us that regulatory and policy risk has become the dominant factor, even when earnings are strong."

— Mike Chubak, Wolfe Research analyst

Fed Independence Fears Compound the Anxiety

Layered atop the credit card concerns were deepening worries about Federal Reserve independence. The Supreme Court is scheduled to hear arguments on January 21 regarding President Trump's authority to remove Fed Governor Lisa Cook—a case with implications that extend far beyond any single personnel decision.

Bank stocks are particularly sensitive to Fed policy uncertainty. The entire sector's net interest income—the bread and butter of traditional banking—depends on the interest rate environment, which in turn depends on Fed decisions. A politicized central bank introduces unpredictability that markets struggle to price.

Adding to the unease, Federal Reserve Chair Jerome Powell disclosed earlier in the week that the Department of Justice had served grand jury subpoenas related to his Senate testimony—an extraordinary development that prompted 14 international central bank heads to issue a statement defending central bank independence.

The Valuation Paradox

The selloff occurred against a backdrop of historically elevated bank valuations. Financial stocks surged more than 32% in 2025, substantially outperforming the broader market. That rally was built on expectations of continued economic growth, robust capital markets activity, and a friendly regulatory environment.

Wednesday's action suggested that at least some of those assumptions may need revision. The Financial Select Sector SPDR Fund (XLF) is now down 1.3% year-to-date, trailing the S&P 500's modest gains.

"Banks were priced for perfection," noted one portfolio manager at a large asset management firm. "When you have multiple sources of policy uncertainty hitting simultaneously, even strong earnings can't overcome the de-rating pressure."

Consumer Credit Warning Signs

Beyond policy risk, some analysts pointed to concerning trends in the banks' consumer credit portfolios. Auto loan delinquencies have risen to their highest levels in 15 years. Credit card charge-offs have increased. And the mix of consumer borrowing has shifted toward higher-risk profiles as financially stressed households lean more heavily on revolving credit.

Bank executives addressed these concerns directly in their earnings calls, generally expressing confidence that credit losses remain manageable and that employment trends support continued consumer resilience. But the market's skepticism was evident in the stock price reaction.

What Thursday's Earnings Brought

The earnings parade continued Thursday, with Goldman Sachs and Morgan Stanley reporting results that largely beat expectations. Goldman's record equities trading quarter and Morgan Stanley's wealth management strength provided some respite, with those shares bucking the negative trend and trading higher in early action.

But the damage from Wednesday's session reflected something deeper than daily earnings reactions: a fundamental reassessment of how much policy risk premium should be embedded in bank valuations.

For investors in the sector, the lesson is familiar but worth repeating: earnings matter, but they're not the only thing that matters. In an environment where regulatory frameworks can shift quickly and political uncertainty looms large, even the strongest quarterly results may not be enough to protect against broader macro headwinds.