After Standard & Poor's cut the U.S.' sovereign debt rating, the major U.S. stock market indices plunged. How will the downgrade affect financial stocks, in particular? Fred Cannon, director of research/chief equity strategist at Keefe Bruyette & Woods, offered CNBC his insights.
"Ironically, you think of a debt downgrade, [you assume] higher borrowing rates," Cannon said.
"But the problem the banks face, when you look at the long bond and its current level, that flattening yield curve is a very tough environment, especially if it's prolonged, to make money for banks. It's earnings at risk."
While the "industry as whole" enjoys "massive levels of liquidity and capital," he sees possible trouble ahead for banks dealing with home equity and consumer credit.
Cannon pointed to Bank of America as "the one company of the large banks we're most cautious on right now."
Why? The strategist noted three factors: BofA's capital is the "thinnest" of the giant financials; it "didn't pass the stress tests"; and lastly, controversial "mortgage issues."
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