Here's Why Capital One Stock Is Getting Crushed by Tariffs

The stock market was having its worst day in several years on Thursday in the wake of President Trump's global tariff announcement. In a nutshell, the tariff rates were largely far higher than expected and applied to more countries as well. The resulting concerns about their macroeconomic impact sent the S&P 500 down by more than 4% as of 2:30 p.m. ET.

Some stocks were faring much worse than the overall stock market, and Capital One Financial (NYSE: COF) is certainly in this category. Shares plunged by about 9% on the tariff news, and there was a good reason for it.

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Bank stocks could suffer

Banks' financial states are highly dependent on the strength of the U.S. economy. In order to keep their lending businesses growing and borrowers' loan default rates low, they need consumer confidence to remain high and unemployment to remain low.

When the economy weakens, or even falls into a recession, loan volumes are apt to shrink. And amid a downturn, more people wind up in situations where they are unable to cover their bills, or keep up with their loans and credit card payments.

In a nutshell, there is widespread fear that Trump's tariffs will sharply raise prices on the goods purchased by U.S. consumers at a time when many were already feeling squeezed due to the lingering impacts of the inflationary spike from a few years ago.

Why is Capital One getting hit so hard?

In Capital One's case, the bank's focus on credit card lending makes it especially vulnerable to economic weakness. Roughly half of Capital One's $328 billion loan portfolio is composed of credit card receivables. Its net charge-off rate in the fourth quarter was 6% (annualized), but this could spike much higher if times get tough. In 2009 (in the wake of the financial crisis), Capital One's credit card net charge-off rate was close to 10%. Another spike like that could cause the bank's profit margins to collapse.

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Matt Frankel has positions in Capital One Financial. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.