Trump Trade Sparks Biggest Financial Stock Inflows In 2 Years

Financial stocks are basking in a post-election rally after Donald Trump's election win as investors anticipate a friendlier regulatory landscape for banks, brokers and consumer finance companies.

With expectations of deregulation and possible tax cuts, traders are piling into financials at levels not seen in years.

The Financials Select Sector SPDR Fund XLF jumped over 5% last week, hitting fresh record highs, while weekly inflows surged to $1.573 billion—the highest in over two years.

Regional banks, in particular, were on fire, with the SPDR S&P Regional Banking ETF KRE skyrocketing nearly 11% and seeing $1.09 billion in inflows, marking its largest influx of money since March 2023.

Key Drivers: Deregulation, Tax Cuts Fuel Investor Optimism

Investors are betting on a wave of Trump-favored financial reforms that could benefit the sector.

Richard Ramsden, a Goldman Sachs analyst, highlighted that "the market is pricing in the potential for changes to a number of proposed regulations, a step up in capital markets activity, as well as the potential for a reduction in the corporate tax rate."

Potential regulatory changes under Trump could include:

1. 401K Reform: Opening up retirement plans to private investments could attract a flood of new capital.
2. Relaxed Antitrust Regulations: A more lenient antitrust stance may spark increased mergers and acquisitions (M&A) activity.
3. Reduced SEC Oversight: There is limited clarity on whether the SEC will continue probing brokers' sweep pricing practices.
4. Crypto-Friendly Policies: Financial firms with crypto exposure may benefit from a more favorable regulatory environment and higher digital asset prices.

Goldman Sachs's Top Picks Among Financials Stocks

In anticipation of these shifts, Ramsden and his team have identified several top picks across the financial sector.

Here's where they see the biggest potential gains:

• Large Banks: Citigroup Inc. C, JPMorgan Chase & Co. JPM, and Wells Fargo & Co. WFC.
• Consumer Finance: Bread Financial Holdings BFH, Synchrony Financial SYF, and Capital One Financial Corp. COF.
• Capital Markets: Blackstone Inc. BX, Apollo Global Management Inc. APO, KKR & Co. Inc. KKR, LPL Financial Holdings LPLA, Tradeweb Markets Inc. TW, Evercore Inc. EVR, and PJT Partners Inc. PJT.

Steeper Yield Curve Expected to Boost Regional Banks

As markets react to potential economic stimulus and reduced regulatory pressure, analysts anticipate a steeper yield curve, which could be a windfall for banks with heavy exposure to fixed-rate assets.

Around 60% of both regional and large banks' balance sheets consist of fixed-rate holdings, positioning them to profit as long-term rates rise.

Ramsden's picks for banks that stand to gain the most from a steeper yield curve include:

Regional Banks:

• Citizens Financial Group Inc. CFG
• Comerica Inc. CMA
• First Hawaiian Inc. FHB
• Zions Bancorporation ZION
• Truist Financial Corp. TFC
• Huntington Bancshares Inc. HBAN
• Regions Financial Corp. RF
• PNC Financial Services Group Inc. PNC
• Ally Financial Inc. ALLY.

Surge in Capital Velocity: M&A and Trading Boost Expected

Trump's pro-business stance is also expected to accelerate capital velocity in the M&A and equity capital markets, providing a strong backdrop for trading activity.

According to Ramsden, large banks like Morgan Stanley MS could be the biggest beneficiaries, while among regional banks, KeyCorp KEY and Citizens Financial Group Inc. CFG stand out.

Investment banks could also see a boost, with Jefferies Financial Group Inc. JEF, Moelis & Co. MC, PJT Partners Inc. PJT, and Piper Sandler Companies PIPR positioned to capitalize on a more active M&A market.

In the alternative asset management space, Carlyle Group Inc. CG, KKR, Apollo, TPG Inc. TPG, and Ares Management Corp. ARES are expected to benefit from an uptick in private equity deal flow.

Tax Cut Hopes Could Supercharge Regional Banks

Financial stocks are uniquely positioned to benefit from any corporate tax reductions, given that 90% of their earnings come from the U.S. and are currently taxed at an average rate of 23%. After the 2017 tax reform slashed the corporate tax rate from 35% to 21%, financials saw their effective tax rate drop by 10 percentage points.

Ramsden estimates that if the Trump administration pursues another tax cut, regional banks would likely see the most significant upside.

His top tax-cut beneficiaries include Moelis & Co. MC, American Express Co. AXP, Evercore Inc., Bread Financial Holdings, Piper Sandler, First Citizens BancShares Inc. FCNCA, Synovus Financial Corp. SNV, and Western Alliance Bancorporation WAL.

Insurers to Benefit from Steeper Curve, P&C Pricing Power

The insurance sector may also stand to gain under Trump's pro-business policies. Ramsden expects potential increases in claim costs but sees positive momentum for property and casualty pricing.

Insurers with substantial U.S. exposure and a favorable position on the yield curve could see tailwinds.

Ramsden's picks in the insurance space include W.R. Berkley Corp. WRB, Hartford Financial Services Group Inc. HIG, and The Travelers Companies Inc. TRV, which he believes are better positioned than brokers to benefit from these trends.

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