Why bank stocks shocked everyone by getting thrashed

So much for bank stocks loving higher interest rates.

That old saw is being completely ignored ahead of earnings from big banks, which kick off this week with numbers out of JPMorgan ( JPM ), Bank of America ( BAC ), Goldman Sachs ( GS ), and Wells Fargo ( WFC ).

Share prices across the entire banking sector have flat-out crashed, placing many top names in correction territory — down 10% from their highs.

Over the past month, JPMorgan has shed 6%, Citigroup is down 6.5%, Wells Fargo is off 7%, Morgan Stanley ( MS ) is down 11%, Goldman Sachs is down 12%, and Bank of America is down 13%.

Even the KBW Nasdaq Bank Index ( ^BKX ), which tracks the 24 publicly traded US banking stocks, is now down more than 14% from its August peak.

"This means if the Bank Index continues to drop even with the S&P 500 hitting new highs, it could be a major warning sign for the US stock market," the team at the Macro Paper said.

Pros point to a few factors for the surprise sell-off despite the US economy continuing to chug along.

The first is what may be a less lucrative market for deals in the near term amid concerns about sky-high valuations on tech companies. To that end, it's unlikely OpenAI's ( OPAI.PVT ) IPO will happen this year, and others thought to be coming to market are on pause.

"Indeed Oura's delayed IPO while the generational OpenAI offering expected this year being pushed back to 2027 has raised fears of a deteriorating funding environment. Deposit competition from AI offerings maximizing cash yields has also weighed on sentiment," Evercore ISI strategist Julian Emanuel said.

The other issue at play is the perception that new technology will meaningfully disrupt the financial services space in the years to come. For example, companies such as Robinhood ( HOOD ) and Coinbase ( COIN ) have unveiled new agentic trading capabilities for their customers. (Disclosure: Yahoo Finance has a partnership with Coinbase.)

Emanuel explained, "Focus this reporting season will first be placed intently on Financials, whose recent underperformance has been striking. The sector has historically been a beneficiary of higher interest rates (supporting net interest margins) but has fallen precipitously since yields have spiked above 5% and as some perceive a threat to financials' margins with the debut of consumer AI Agent Muse."

Brian Sozzi is Yahoo Finance's Executive Editor, host of the Sozzi Unleashed morning show and the Power Players with Brian Sozzi podcast, and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi , Instagram , and LinkedIn . Tips on stories? Email brian.sozzi@yahoofinance.com.