The stock market has cooled off a little in the past few weeks after a bumpy first quarter, but the action is ongoing in the bond market.

As inflation remains extremely hot (though with glimmers of a possible future cool-off) and the Federal Reserve has signaled a resolve to ratchet rates up substantially this year, bond yields have loitered higher. The U.S. Treasury 10-year note rose to 2.83% this week, from 2.39% on April 1 and 1.52% on the last day of 2021.

Much of the focus this year has centered on the headwinds that higher rates posed for fast-growing companies, particularly last year’s high-flying technology and communications stocks. In more recent times, high mortgage rates have caught up to homebuilders and furnishing retailers.

Bank stocks have been another interesting story. Some bank stocks entered 2021 with a bang. Among the giants of the industry, Wells Fargo (WFC) soared 61 percent last year, Bank of America (BAC) climbed 49.6 percent, and JPMorgan Chase (JPM) increased 27.7 percent. Those returns have helped power the bank-connected Financial Select Sector SPDR ETF (XLF) 34.8% in 2021.

One of the reasons for the rally was that long-term interest rates were rising but short-term rates remaining low because of the Fed. The result was something called a “steepening yield curve,” which is good news for bank profits. Banks can take cash in at low short-term rates and make loans to customers at higher longer-term rates, increasing their net interest income. Meanwhile, the economy is humming, providing a very favorable backdrop for lending. Almost a goldilocks scenario.

On the negative side, many bank stocks were trading close to or above estimates of fair value. Bank of America, finished last year 17% above the estimate of its fair value.

As strategist Eric Compton warned in January, “the vast majority of bank sector theses we’re seeing boil down to ‘higher rates lead to good earnings momentum, therefore you should buy banks.’ Eventually, in our view, investors will have to look beyond this.”

That story has been turned on its head in 2022. As it became apparent the Fed will be raising the federal-funds rate, market rates in the short end soared to the point that two weeks saw the yield on the two-year note was briefly above that of the 10-year, a dynamic known as an “inverted yield curve,” and one that takes away some of the tailwind from net interest income profits at banks.

At the same time, the economic outlook has appeared cloudier as inflation has remained higher than many anticipated, eating into consumers’ ability to spend. The effects of Russia’s invasion of Ukraine have only increased the uncertainty, and in some cases, forced world banks to absorb losses stemming from the Russian attack and sanctions.

Earlier this month, Compton wrote “because interest-rate expectations are high, we believe that it is an imperative for investors to assess their rate risk exposure. If the higher rate narrative blows up in our faces and the economy stagnates, there are downsides at current prices. Some indicators of recession risk are climbing, and we can see this as it unfolds in real time.”

At the same time, several bank stocks have been hammered this year. Which has followed a decline in valuations.

So what should we do now with bank stocks? As first-quarter earnings have arrived, the picture has been mixed.

With JPMorgan, although overall first-quarter earnings were weighed down by higher expenses and lower investment banking fees, Compton says the bank’s numbers indicate a still robust net interest income outlook.

It was “disappointing” for Wells, Compton described the first quarter earnings report, and although net interest income was virtually flat, “it was not all bad news,” he wrote. “Given recent changes in rate expectations and better-than-expected loan growth, management now believes they could potentially grow net interest income by a midteens amount this year, roughly double their 8% growth guide from last quarter.”

We’ll get more clarity as earnings continue to roll in over the next week, starting with Bank of America on Monday.