Banking stocks faced significant losses on Friday as concerns about the state of the economy and a lack of positive catalysts alarmed investors. The Financial Select Sector SPDR exchange-traded fund (ETF) plummeted by 1.7%, reaching a seven-month low in afternoon trading. Of the 72 equity components in the ETF, 67 experienced a decline. This ETF has encountered a bleak month, losing 5.1% so far, and it is on track to have its first three-month losing streak since April 2022.

The SPDR S&P Bank ETF, following suit, slid by 2.6% during afternoon trading, while the SPDR S&P Regional Banking ETF sank by 2.7%, posting its largest percentage decline since October 18. The KBW Nasdaq Bank Index experienced a significant drop of 2.6% to a value of $71.51. This marks the index's lowest level since September 25, 2020, where it closed at $71.08, according to Dow Jones Market Data.

Vivek Juneja, an analyst from JPMorgan, commented on the recent weakness in the sector, cautioning investors to stay on the sidelines due to uncertainty regarding the economic outlook and the implications of persistently high interest rates. Juneja pointed out that the sector currently lacks a near-term catalyst, with weak commercial loans, slowed capital-market issuance activity, and the murky economic landscape during an election year.

Among the more active components of the Financial Select Sector SPDR ETF, JPMorgan Chase & Co. witnessed a significant drop of 3.5%, the largest one-day decline since March 17. This decline sent the stock towards its lowest close since May 31. Similarly, Bank of America Corp.'s stock experienced a substantial sell-off, dropping by 3.7%, which also marked its largest decline since March 17. The stock is approaching its lowest close since November 6, 2020.

Other major banks in the financial ETF faced similar losses, as Citigroup Inc. saw a decline of 2.5%, nearing a 3½-year low. Wells Fargo & Co. encountered a 2.1% drop, while Morgan Stanley saw a decline of 2% to reach a 2½-year low. Regions Financial Corp.'s stock slumped by 2.8%, heading towards its lowest close since November 6, 2020, after Juneja downgraded the stock from buy to neutral and removed it from JPMorgan's Analyst Focus List. Juneja cited a lack of catalysts and the need for increased investment in cybersecurity due to the bank's unexpectedly high fraud costs in the past two quarters.

In addition to the sector-wide decline, banks also had mixed performances during the third quarter. Analyst Timothy Coffey, who covers regional banks at Janney, highlighted a common theme during this earnings season – higher interest rates impacting the demand for loans. Coffey noted that almost every bank experienced a decrease in loan pipelines, not only on a year-over-year basis but also on a quarter-over-quarter basis.

With higher-for-longer interest rates presenting a challenge, banks are taking stock of their mixed third-quarter earnings as they grapple with uncertain economic conditions.