The yield curve inverted this week, with the 3-month treasury bill currently yielding 2.36%, higher than the 10-year treasury bond yield of 2.24%. Stocks have gotten hammered this week. A thin spread between short- and long-term yield is bad for banks, and of course, an inverted spread is worse, as banks' net interest margins are directly impacted by yield spreads.
And with the economy clearly slowing -- JPMorgan economists say they see U.S. second-quarter 2019 GDP slowing to just 1% -- the Federal Reserve is far more likely than previously to cut interest rates in 2020.
Bank of America would see EPS fall by about 2% from current expectations, Morgan Stanley analysts said. BB&T (BBT) - Get BB&T Corporation Report could see a 1% EPS ding from stimulus, which is the second-hardest hit out of the 17 banks in Morgan Stanley's analyst coverage. JPMorgan (JPM) - Get JPMorgan Chase & Co. (JPM) Report and Citigroup (C) - Get Citigroup Inc. Report could both see 0.6% to 0.7% hits to EPS.
Meanwhile, if there's a recession, which the analysts aren't currently predicting for the very near future, the banks in their coverage could see an average EPS hit of 33%. Plus, the SPDR S&P large cap bank ETF (KBE) - Get SPDR S&P Bank ETF Report is up more than 13% this year, so it has more than participated in 2019's equity rally. Should the risks Morgan Stanley cites come to fruition, big bank stocks could get hit hard.
Speaking of risk, Tesla (TSLA) - Get Tesla Inc Report , one of the riskiest stocks out there, is TheStreet's premium sister publication Real Money's stock of the day. The stock has been slammed, and could get slammed even harder.
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