U.S. financial stocks are experiencing their worst start to a year since the COVID-19 pandemic, as investors grow increasingly nervous about risks tied to private credit markets, rising oil prices, and global conflict. The sector has fallen sharply in 2026, with analysts warning that more turbulence could lie ahead.
The S&P 500 Financials Index, which includes major banks and investment firms, has dropped about 11% so far this year. If the trend continues, it will mark the index’s steepest quarterly decline since early 2020, when markets plunged at the start of the pandemic.
Several major companies have been hit particularly hard. Shares of Ares Management Corp. and Blackstone Inc. have both fallen more than 30% this year. Wells Fargo & Co. is down roughly 20%, while Blue Owl Capital Inc., a major player in private credit that is not included in the index, has plunged more than 40%.
Despite the sharp declines, investors have been reluctant to buy the dip. Analysts say the problems affecting the sector appear far from resolved. Concerns about private credit funds, the impact of artificial intelligence on heavily indebted software companies, and a surge in oil prices linked to conflict with Iran have all contributed to market anxiety.
Bill Katz, an analyst at TD Cowen, said investors are struggling to determine when it might be safe to reenter the sector. According to Katz, fears surrounding private credit are now intertwined with broader uncertainty about AI’s impact on businesses and the global economy, creating a negative feedback loop for financial stocks.
The volatility in financial shares has also amplified worries about the broader economy. Banks often provide insight into economic health because their lending activity reflects both consumer spending and corporate investment.
The KBW Bank Index, which tracks major banking stocks, has fallen more than 10% this year and is on pace for its worst quarter since the regional banking crisis of early 2023.
Strategists at Bank of America say a combination of factors—including a softening job market, rising inflation concerns, and stress in private credit—could create what they call a “perfect storm” for banks.
Michael O’Rourke, chief market strategist at Jonestrading, noted that default rates rising during a relatively strong economy could be an ominous sign.
“If defaults are occurring in a strong economic environment,” he said, “then one should expect them to accelerate if the economy slows.”
Some prominent financial leaders have even drawn comparisons to the period leading up to the 2008 financial crisis. Jamie Dimon, CEO of JPMorgan Chase, and former Goldman Sachs chief Lloyd Blankfein have both warned about potential risks building in the financial system.
Still, the situation today differs in key ways. The private credit market, while large at about $1.8 trillion, is much smaller relative to the economy than the mortgage-backed securities market was before the 2008 crash.
Nevertheless, bearish bets against private credit firms are climbing. Short interest in Blue Owl recently reached a record high, while bets against Ares have climbed to their highest level in nearly six years.
Private credit funds are also facing pressure from investors requesting to withdraw money. Some major managers—including BlackRock Inc., Morgan Stanley, and Cliffwater—have limited withdrawals from certain funds to manage the outflows.
At the same time, default rates are rising. According to Fitch Ratings, defaults in private credit markets reached 5.8% in the 12 months through January, the highest level since the firm began tracking the data in 2024.
John Cole Scott, president of CEF Advisors, said many institutional investors remain cautious about increasing their exposure to a sector facing both technological disruption and credit concerns.
Still, not everyone is pessimistic. Some analysts argue the selloff may have gone too far, noting that many private credit firms are still expected to generate strong earnings growth and continue attracting new investments.
Wilma Burdis, an analyst at Raymond James, said valuations for many financial stocks now look unusually attractive.
“At some point,” she said, “there will be little juice left in shorting these stocks.”
Even so, most experts believe investors will remain cautious until the market shows signs of stability. For now, volatility—and uncertainty about private credit and the broader economy—continues to keep many buyers on the sidelines.
