As the global economic outlook darkens, American banks have an unenviable job: Convincing a jittery public that the US economy remains strong and can keep growing.

Concerns about whether the economy can continue expanding have gripped investors in recent weeks, and spurred erratic swings in global markets. Such fears threaten to weigh on banks this year, because their performance is closely tied to the health of the economy.

Bank profits suffer when the economy stumbles and businesses are scared to borrow. They become especially vulnerable when a recession hits and some customers aren’t able to pay back loans.

Whether a recession looms will be a key topic of discussion this week, when major US banks such as JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) report earnings from the final three months of 2018.

Wall Street executives almost certainly will be asked to prognosticate about the state of the economy — and what it could mean for businesses if growth falters after a lengthy run.

“We’re in a mature stage of economic growth in the US,” said Fred Cannon, director of research at Keefe, Bruyette & Woods. “It’s hard to find a real expansion area [for banks] right now.”

Profits up, shares sag

Last year, bank stocks diverged from the actual business performance.

Banks brought in record profits, according to data from the Federal Deposit Insurance Corporation. In the third quarter of 2018, FDIC-insured banks reported $62 billion in profit, an all-time high and up nearly 30% compared to the previous year. Both President Donald Trump’s corporate tax cuts and the buzzing economy played a role.

But bank shares sagged, trailing the market amid apprehension about what could be coming down the pike. The financial sector (XLF) fell almost 15% in 2018. Comparatively, the Dow fell 5.6%, and the S&P 500 was down 6.2%. JPMorgan Chase, a top performer, dropped about 9% last year.

One reason for worry has been the shrinking difference between short-term and long-term bond yields. Before almost every recent recession, the so-called yield curve has inverted, meaning short-term rates are higher than long-term ones. That indicates investors are not enthusiastic about long-term growth.

The flattening yield curve affects the income banks collect from lending, since banks pay interest on short-term rates and lend at long-term rates. They make money off the difference.

When the banks report this week, Wall Street will likely pay close attention to consumer and business loans. Analysts predict solid loan growth for last quarter. But the segments will be keenly monitored as barometers of economic health.

Steve Biggar, an analyst at Argus Research, noted in a December memo that loan growth has been increasingly “sluggish” as interest rates have gone up, particularly for auto loans and home loans. Businesses have also cut back on borrowing, he said.

“We don’t see another surge in commercial real estate that would encourage a lot of borrowing,” Cannon said. “We see concerns about leveraged lending, which is an area that has grown rapidly.” Businesses already have high debt loads, he added.

M&A activity

Last quarter’s market volatility could also lead to questions about the pace of mergers and acquisitions and public offerings. Activity in the capital markets can dwindle when they’re choppy, which causes banks to lose out on advisory fees. Banks’ asset management divisions are also sensitive to market behavior.

While there’s plenty of reason to scrutinize bank performance, market watchers aren’t exactly worried about their survival.

Regulators have gone to great lengths since the 2008 financial crisis to ensure banks would be on solid footing in the event of another recession. They now mandate that banks maintain certain levels of liquid assets, which can be easily converted to cash to pay off obligations.

Since the financial crisis, liquid assets in the banking system have increased by more than $3 trillion, according to a November report from the Federal Reserve Board of Governors. Banks have also maintained solid capital levels to cushion any losses, and have largely tried to avoid the sort of risky lending that got them in trouble before.

“You don’t see the excesses in lending on bank balance sheets that you saw going into the last recession,” Cannon said.