US stocks fell yesterday after a prominent banking analyst warned the sector’s fundamentals have yet to improve, and an unexpectedly large drop in wholesale inventories raised worries about an economic recovery.<br /><br />Financial stocks, which had gained about 25 per cent in the last month, tumbled after <strong>Rochdale Securities</strong> analyst Richard Bove painted a gloomy outlook for the banking industry. He said bank stocks are trading on “fumes,” and he expects a short-term pull-back in their stock prices.<br /><br />The financial sector of the S&P 500 shed 3.5 per cent while the KBW Bank Index was down 4.4 per cent. The stocks were also affected by a report late Monday from the Congressional Oversight Panel, which highlighted the risks of toxic assets still on the books of many banks.<br /><br />“Banks aren't out of the woods yet” said Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets.<br /><br />“There are some worries about additional equity that needs to be raised. The market is going to have a hard time moving meaningfully higher without them,” Kruszenski said.<br /><br />The drop in US wholesale inventories in June, which was nearly double expectations, suggests that businesses remained sceptical about a return in demand.<br /><br />The Dow Jones industrial average closed down 96.28 points, or 1.03 per cent, to 9,241.67. The Standard & Poor's 500 Index fell 12.77 points, or 1.27 per cent, to 994.33. The technology-laced Nasdaq Composite Index slid 22.51 points, or 1.13 per cent, to 1,969.73.<br /><br />Adding to losses for financials, <strong>Miller Tabak</strong> cut its price targets on <strong>Zions Bancorp</strong> and <strong>Regions Financial</strong>. Shares of Zions stumbled 8.4 per cent to $16.43, while Regions dropped 4.2 per cent to $4.76. The S&P Regional Banks sub-index slipped 4.2 per cent.<br /><br />The Congressional Oversight Panel, a watchdog for the government’s bailout program, said toxic loans and securities continue to pose a threat to the financial system, particularly for smaller banks that face mounting losses on commercial real estate loans.<br /><br />Investors were also cautious as a two-day monetary policy meeting by the US Federal Reserve got under way yesterday. The focus will be on signs from the Fed of an exit strategy from its quantitative easing policy.<br /><br />Earnings reports are due this week from retailers Wal-Mart, JC Penney and Macy’s, which may provide some insight on whether consumer spending, roughly two-thirds of the US economy, is stabilising.