Commonwealth Bank of Australia (ASX: CBA) shares have enjoyed a strong rebound since plumbing eight-month lows of $147.22 on 21 January.
In late morning trade today, shares in S&P/ASX 200 Index (ASX: XJO) bank stock are down 0.4%, trading for $176.47 apiece.
Despite today's dip, that sees CBA shares up 19.9% since market close on 21 January.
For some context, the ASX 200 is down 3.2% over this same period.
But with the Reserve Bank of Australia (RBA) increasing interest rates for the second time in 2026 on Tuesday – lifting the official cash rate by 0.25% to 4.10% – that strong outperformance could be about to shift into reverse.
That's the warning issued by Morgan Stanley this week, with the broker cautioning that CBA's earnings could take a material hit.
Here's why.
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Are CBA shares eyeing the perfect storm?
The RBA is back on the tightening path in an effort to rein in resurgent inflation. Higher interest rates work to reduce demand. But if energy prices remain high amid the Iran war, higher rates also could put the brakes on Australia's GDP growth.
Indeed, Morgan Stanley bank analyst Richard Wiles said fast rising interest rates could "fundamentally shift operating conditions" for CBA shares and the other big four ASX bank stocks (quoted by The Australian Financial Review).
"The uncertain environment raises the risk of both earnings downgrades and a de-rating, increasing the probability that banks underperform the ASX 200 in 2026," Wiles said
Amid the prospect of two more RBA interest rate hikes this year, Morgan Stanley expects Australia's GDP growth to slow to 1.6% in 2026, down from 2.6% last year.
This in turn, would likely impact CBA's loan growth. In a worst-case scenario, Wiles said that CommBank could see its earnings downgraded by 8.9%.
Should that occur, Wiles said that CBA shares could plunge more than 42% to $101.50 each.
What about the other big four ASX 200 bank stocks?
It's not just CBA shares that could be looking at a sharp fall.
Wiles estimates that in the above scenario, Westpac Banking Corp (ASX: WBC) earnings would be downgraded by 9.7%; ANZ Group Holdings Ltd (ASX: ANZ) earnings would be downgraded by 10.1%; and National Australia Bank Ltd (ASX: NAB) earnings would be downgraded by 14.3%.
That could see Westpac shares fall more than 35% from the current $41.27 to $26.50; NAB shares could tumble more 30% to $32.90; and ANZ shares could fall almost 20% to $29.80 each.
CBA shares and the other ASX 200 banks are at particular risk as they're already trading at high price to earnings (P/E) ratios.
Wiles concluded (quoted by the AFR):
History tells you that when the RBA hikes, bank price-to-earnings multiples go down. It hasn't happened yet, but that's what's happened historically.
Our own forecasts currently assume a favourable operating environment continues. That means the banks are vulnerable to de-rating risk and that an earnings downgrade risk could emerge if the economy slows down more than expected.
