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The selloff in US bank shares is threatening to push them below a technical threshold that could signal more pain ahead for the broader stock market.

With the collapse of First Republic Bank worsening fears about the solvency of regional lenders, investors have pummelled financial stocks, leaving the S&P 500 financials index on the verge of falling back below its 2007 peak. For perspective, after the 2008 credit crash it took over a decade for that gauge to recover the ground it lost.

The financials index has been above the 2007 high since January 2021. If were to fall through that barrier now, it would be an ominous signal for the broader stock market, said hedge-fund manager Jim Roppel, founder of Roppel Capital Management.

Why? Because it could put further pressure on banks to conserve capital and cut back on lending, adding a drag to an economy already at risk of a recession after the Federal Reserve’s steep interest-rate increases over the past 14 months.

“You can’t have a bull market if bank stocks are falling,” said Roppel, who’s a long-term bull but currently is mostly in cash with the rest in defensive plays like gold and gold miners. “It’s like if an Olympic athlete had cinder blocks around their legs.”

Wild Week

Concerns about the stability of the banking system contributed to a tempestuous week as investors aggressively bet against the stocks.

While the share prices rebounded on Friday amid speculation the selling was overdone, many remained down steeply, with Western Alliance Bancorp sinking 27 percent last week and PacWest Bancorp plunging 43 percent.

Individual investors — who were some of the market’s most reliable dip buyers in 2020 and 2021 — scooped up some bank stocks amid the rout. In the week through Wednesday, they were net buyers in shares of Bank of America Corp., Truist Financial Corp. and SoFi Technologies Inc., data compiled by JPMorgan Chase & Co.’s Peng Cheng show.-Bloomberg