Wells Fargo slides again: What cooling sentiment means for investors

Big banks can wield enormous influence on Wall Street. But sometimes the market flips the scrips and investors start questioning the banks themselves.

That’s the situation facing Wells Fargo as its stock continues to drift lower amid rising economic concerns and cautious analyst sentiment.

Macros worries and industry risks

Shares of WFC stock dropped more than 4% midweek, adding to a broader slide in bank stocks as traders reassess the economic backdrop.

Several powerful forces are converging at once, including:

• Rising oil prices, which are renewing inflation concerns
• Weaker payroll data has sparked labor market worries
• Climbing Treasury yields lower near-term rate-cut odds

Banks are especially sensitive to these shifts because their profits depend heavily on lending activity.

Additionally, there are some company-specific headlines that give investors pause. Wells Fargo’s exposure to a collapsed US mortgage lender and persistent questions about its long-term revenue growth and declining net interest income are weighing on forecasts.

The company is also flashing technical warning signs. The MACD sell signal and a relative strength index near putting the stock near oversold territory are indicators that investors are growing defensive.

There is some positive news, including the Fed’s decision to end a long-running 2018 enforcement action involving Wells Fargo, but so far it hasn’t been enough to meaningfully move the needle in the right direction.

Institutions are sending mixed signals

Professional money managers are starting to reflect a cautious consensus. Capital World Investors trimmed its stake in WFC by 2.3%, selling more than 430,000 shares. Private Advisor Group cut its position by 7.5%. And insider selling over the past three months has added up to 115,000 shares worth about $10 million.

But Wall Street hasn’t given up on Wells Fargo entirely. Analysts still give it a “moderate buy” rating overall with an average price target near $97 vs. Wednesday’s $76.88 closing price. And institutional investors still hold more than 75% of the company’s shares. In the end, it comes down to a debate about whether the company can accelerate growth. Over the past five years, WFC’s revenue ticked up by just 2.5% annually, while net interest income declined by roughly 1.5% per year. Both trends make strategists cautious about supporting a higher valuation.

That isn’t to say Wells Fargo is a broken company. It does appear to be in a slow-growth phase through this sensitive economic environment, though. For retail investors building a portfolio, stumbles in a cyclical sector like banking should be a reminder to focus on long-term drivers of growth instead of short-term macro-fueled dips.