Private Credit Fears, War Darken Outlook For US Financial Stocks
Photographer: Michael Nagle/Bloomberg
(Bloomberg) — Financial stocks are off to their worst start to a year since the Covid pandemic, with investors expecting more pain ahead as worries over everything from private credit to the Iran war roil the troubled sector.
The S&P 500 Financials Index — whose members run the gamut from the biggest US banks to private credit companies — is down 11% this year, on track for its biggest quarterly decline since the beginning of 2020. Losses in some individual names are far greater: shares of Ares Management Corp. and Blackstone Inc. are each down more than 30% year-to-date, while Wells Fargo & Co. is off 20%. Blue Owl Capital Inc., which is not in the index, has slumped more than 40%.
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The selloff has taken the sector’s once-lofty valuation to its lowest level since 2023. Yet dip-buyers have been hard to come by — largely because the issues plaguing financial stocks appear far from resolved. Those include the private credit worries rattling alternative asset managers, potential disruptions to heavily indebted software companies from artificial intelligence and a war-driven oil price surge that’s revived global inflation fears and sparked a broad slide in equities.
Investors “are trying to figure out when to step in, but it’s very difficult just given the headlines in the industry and the headlines in the market at large,” said TD Cowen analyst Bill Katz. “Anything to do with private credit, interrelated with AI software uncertainty and then linked to a global wealth vehicle is creating this negative feedback loop.”
Given the sector’s central role in the economy, the volatility in financial shares has added to the angst already swirling around other issues, including President Donald Trump’s tariffs and a potential rebound in inflation. Banks provide a good read on the state of both consumers and other companies, via spending and corporate dealmaking activity.
The KBW Bank Index is down more than 10% this year and on track for the worst quarter since the regional banking crisis in early 2023.
Strategists at Bank of America Corp. said investors are growing increasingly concerned over the outlook for US banks, with factors including a weakening job market and inflationary pressures combining with private credit woes to create a “perfect storm for the sector.”
“It’s important to remember this has been a relatively robust economic environment over the past year,” said Michael O’Rourke, chief market strategist at Jonestrading. “If defaults are occurring in a strong economic environment, then one should expect them to accelerate if the economy slows.”
Some high-profile industry figures — including JPMorgan Chase & Co.’s Jamie Dimon and Lloyd Blankfein, who led Goldman Sachs Group Inc. — have even drawn comparisons to the period that preceded the global financial crisis. Those come even as US growth continues to hold firm, while the private credit market commands a far smaller share of the economy than the market for mortgage backed securities did prior to 2008.
“Even if that’s overstated, few want to hang around to find out,” said Steve Sosnick, chief strategist at Interactive Brokers LLC.
Bearish Bets
Meanwhile, wagers against private credit companies have been mounting. Bearish bets against Blue Owl — a poster child for the worries percolating in the $1.8 trillion private credit market — climbed to an all-time high last week, as measured by the percentage of the company’s free float held short by investors. Short wagers against Ares touched their highest level in almost six years in recent weeks.
On top of questions regarding asset quality, private credit funds have grappled with a wave of redemption requests as concerns swirl around the quality of their loans — particularly to software firms under threat from AI. Morgan Stanley and Cliffwater LLC were the latest money managers to cap redemptions from their multibillion-dollar private credit funds, following a similar move from BlackRock Inc.
At the same time, defaults have climbed to 5.8% in the 12 months through January, according to Fitch Ratings. That’s the highest rate since the firm launched its tracker in August 2024.
“It’s hard to recommend doubling exposure to a sector that is on the front page for AI risk and private‑credit redemptions, even when forward returns improve,” said John Cole Scott, president of CEF Advisors. “Institutional allocators, and even many wealth managers, are still working through governance and narrative risk.”
Of course, the US economy has proven its resilience in recent years — enduring everything from the highest interest rates in decades to global trade uncertainty — and may well do so again. That could vindicate investors who swoop in to buy bank stocks on the cheap.
Some strategists also argue that the market may be overly pessimistic on private credit, with many firms in the industry still expected to post double digit fee-related earnings growth — a key measure of profitability — and healthy inflows.
“At some point, there will be little juice left in shorting these stocks, and we should see an inflection,” said Raymond James analyst Wilma Burdis. “On the fundamentals, valuations are extremely attractive.”
Still, even the sector’s proponents say that volatility will likely keep investors away, for now.
“There is a lot of institutional investor interest in the stocks, but they need to see stability in the stock prices before stepping in,” Burdis said.
–With assistance from Bernard Goyder, David Marino, Matt Turner and Eric J. Weiner.
