Financial Stocks Face Uncertainties Amid War and AI Disruptions

This year, several factors are casting doubts over financial stocks—specifically, the ongoing conflict with Iran, potential disruptions caused by AI, and challenges in private credit markets. While stocks of major players like Goldman Sachs and Wells Fargo are trending downwards, their fundamental business models should generally remain resilient. Still, these companies have been impacted alongside the broader financial sector. In a sharp downturn compared to last year, Goldman Sachs has seen a drop of 11% in 2026, while Wells Fargo has plunged over 20% since the start of the year. It’s important to note that these declines don’t truly represent the underlying business health. This is discouraging, but it might be a temporary phase, suggesting a strong rebound is possible for these Wall Street giants when the dust settles.

Impact of the Iran Conflict

The conflict with Iran has introduced volatility in bank stocks, raising concerns that rising oil prices could negatively affect both consumers and businesses, ultimately leading to lower profitability. Higher oil prices typically translate to increased costs at the pump, affecting everything from gasoline to jet fuel, possibly causing inflationary shocks. Under this scenario, the Federal Reserve may find it challenging to lower interest rates—even with Kevin Warsh likely stepping in as the new Fed chairman. This poses risks for borrowers, as consumers often cut back on spending when they feel financial pressure, which could lead to reduced loan activity or delayed repayments. For businesses, rising energy costs are unavoidable; such increases can squeeze profit margins. And if companies lose confidence, they might hesitate to engage in acquisitions or public offerings, diminishing the demand for investment banking services.

Analyst Ebrahim Poonawalla from Bank of America recently expressed that if stagflation—a situation marked by low economic growth, high inflation, and rising unemployment—sets in, defaults could be on the rise. Poonawalla has noted that risks are looking more pronounced than they did previously.

Wells Fargo, while exposed to lending risks, seems less impacted by the downturn in trading compared to Goldman Sachs, whose Global Banking Markets segment generated nearly 77% of its last quarter’s revenue. This division’s performance will be closely monitored as Goldman aims to expand its investment banking operations to become less reliant on interest income.

Jim Cramer chimed in on Tuesday, suggesting that the ongoing disputes could resolve quickly enough to stave off a recession for now. He highlighted that volatility in the stock market might actually benefit Goldman’s trading operations, which earn fees from offering complex financial options and swaps to hedge against risks. Cramer noted that he is inclined to buy Goldman stocks, and just last Thursday, the stock made it onto a recommended purchase list. Jeff Marks, director of portfolio analysis within Cramer’s investment club, pointed out that Goldman Sachs is currently trading at its lowest price-to-earnings ratio in years—under 14 times the estimated earnings per share for the next year.

In a similar vein, Cramer mentioned that he believes Wells Fargo will bounce back. Its forward P/E ratio is now below 11, again, a historically low figure.

Concerns Over AI Disruption

The increasing adoption of AI has also raised eyebrows among bank investors. Following a report from Citrini Research predicting dire scenarios due to AI displacement of white-collar jobs, financial stocks took a hit last month. The report suggested that unemployment could reach 10% by 2030 if machines take over jobs, potentially harming businesses. However, Cramer dismissed these fears as exaggerated, labeling the Citrini paper as a “dystopian story” and asserting that the integration of AI into the workforce would actually create more jobs.

Goldman and Wells Fargo are already looking to incorporate generative AI to boost efficiency. Goldman has expanded its AI leadership team recently, tapping individuals with diverse backgrounds, including those from Amazon Web Services and Google.

Moreover, Cramer expressed concerns about the rise of private credit, mentioning an increase in redemption requests for high-profile private credit funds this year. Issues surrounding these funds at major asset management firms like Blackstone and BlackRock have also surfaced. Interestingly, while these private credit markets have gained traction as investors seek higher-yielding alternatives, they remain a minor component of overall bank revenues.

Pikorsky pointed out the common misconception that private credit is a significant risk. In reality, these funds typically operate with a higher equity base compared to traditional bank financing, meaning they would need to see substantial declines in asset values before facing serious lending issues.

However, Cramer noted that while private credit isn’t a major concern for banks, they sold stocks in related areas due to distractions. As challenges in private credit have come to light, Cramer believes that the current market environment is not comparable to the financial crisis of 2007.

For those following investment strategies closely, Cramer waits about 45 minutes after alerting members about stock trades before executing any changes in his charitable trust portfolio, ensuring transparency in his investment decisions.