Just as the market appeared to be recovering from a raft of ragged first-quarter numbers from banking, Catherine Murray of J.P. Morgan Chase & Co. downgraded the sector Wednesday.
Ms. Murray lowered the sector to market-to-slightly-underweight from overweight after determining that it will have problems no matter what economic scenario plays out. 
If there is an economic soft landing and things pick up in the near future, bank stocks could lose out as investors shift back to the technology sector, Ms. Murray wrote in a research note Wednesday.
On the other hand, if lower interest rates fail to prevent a recession, asset quality would look grim and could send bank stocks down. And even if low economic growth rates persist, the sector would probably track the market instead of outperforming it, she wrote.
The American Banker index of 225 banks seemed to confirm her outlook, ending Wednesday down 0.9%, while the Standard & Poors 500 and the Nasdaq composite rose 1.59% and 2.14%, respectively.
The relative run in the bank stocks is almost over, Ms. Murray stated. The Fed ease tailwind for the bank stocks is starting to diminish thus general support for the bank group and for lower-quality banks more specifically is likely to fade.
Ms. Murray advised investors to seek out names with higher earnings relative to the group, such as Citigroup Inc., Wells Fargo & Co., and Fifth Third Bancorp.
Joseph Duwan, an analyst at Conning & Co., agreed that investors should remain selective but said he is less fearful that an economic rebound could shift investment back into technology.
Even if the economy does come bank, Mr. Duwan said, investors should have learned their lesson and look for more diversity in their portfolios. If the economy stabilizes, bank stocks would still be considered a haven in comparison with other sectors, he said.
Mr. Duwan said that credit quality would remain the overriding issue for the sector and that the next quarter would continue to show widely varying performance among banks. In contrast, deposit growth showed better growth during the first quarter as long as deposits were priced realistically, he said. Those that do pay low rates, however, will see deposits migrate.
He agreed with Ms. Murray that nonperforming assets would continue to grow in this quarter but that chargeoffs would rise at lower levels.
Mr. Duwan left Keefe, Bruyette & Woods Inc. this year to do banking research at Conning, which so far covers mostly insurance companies. On Wednesday he initiated coverage for 10 banks, rating six of them buy, including Comerica and Fifth Third, and three neutral: KeyCorp, National City Corp., and Bank One Corp. Mellon Financial Corp., with strong buy, is the only top-rated company.
Comerica has dropped sharply since guiding analysts and investors toward lower earnings during last weeks quarterly reporting, Mr. Duwan wrote in his report, but he argued that the correction in valuation is overdone.
Comerica was up 0.23% Wednesday.
