Key Questions: Are Financial Stocks More Attractive Under a Second Trump Administration? 

The financial sector performed strongly in 2024, gaining over 28% and surpassing the S&P 500 Index as the segment recovered from the lows experienced during the banking crisis of 2023. The market gained confidence that the crisis was isolated to a select few banks and that a broader crisis had been averted. Furthermore, the sector benefitted from a resilient economy and a Federal Reserve that became more accommodative as the year went along, allowing for a stronger operating environment for financial companies.

As we look forward to the future and a new administration under President-elect Donald Trump, investors may be wondering what is next and whether the financial sector will remain attractive given the magnitude of changes expected to be made by the incoming administration over the coming years. While any outlook is reliant on official actions being implemented as opposed to mere policy proposals, there is optimism that the new administration will provide financial stocks with several new tailwinds beyond what was experienced in 2024, and that these actions have the means to propel higher the performance of the financial sector as we enter the new year.

First and foremost is the improved outlook for financial regulation under the new administration. A friendlier regulatory environment is expected by the markets as the incoming president appoints new heads to the Federal Deposit Insurance Corporation (FDIC), Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB), just to name a few.

Furthermore, Michael Barr, currently the Federal Reserve’s head of banking supervision, recently announced his decision to step down, allowing Trump to choose a successor. This development provides an example of where a friendlier regulator may positively impact banks, as Barr’s proposal for capital levels was higher than the current levels. The future decisions made by these new agency heads could result in softer requirements across the board, relative to the former leaders under the Biden administration. 

A critically important set of regulations governing the financial sector is known as Basel III endgame, named after the Basel Committee on Banking Supervision that was established in 1974 and designed to ensure financial stability within the banking industry. As the new administration takes hold, updated rules regarding capital requirements, fees, reporting and data privacy, and others may all come under consideration, and based on how these rules are set, they could have an extensive effect.

The new presidential administration is also expected to quickly roll back many adverse opinions, statements, interpretations, and proposals that had been in place under the Biden administration, once again potentially producing opportunities for the companies affected by the rules to outperform initial expectations. The more pro-business environment should be viewed favorably by financial companies and investors alike, as this should provide flexibility to increase earnings and result in higher stock prices. 

The more pro-business environment and relaxed guidelines also have the potential to result in more merger and acquisition (M&A) activity, and possibly faster approvals, as the new administration may be more receptive to dealmaking. The Biden administration had taken a harder stance on M&A, preferring to block deals instead of remedying conflicts, and presented a more cynical approach to potential deals. Any lowering of the bar by the Trump administration could result in amplified activity, a clear opportunity for many financial firms with ties to this business.

Not only is M&A beneficial as a way for companies to obtain scale and efficiency, but within the financial sector it is also a revenue source for many companies. Select financial firms facilitate these deals, offer advisory services, and provide financing where necessary. This potential for increased capital market activity should result in higher fees and returns, again helping support higher stock prices for the involved companies.

Finally, it is believed that the Trump administration will have a sharp focus on growth and innovation. This should have a positive effect on companies within the fintech industry group. While not necessarily new, fintech providers are generally younger than the more traditional financial firms. However, what really stands out is that these fintech providers are also growing quickly.

The presidential administration may seize the opportunity and promote and facilitate this growth even quicker as the administration prioritizes modernizing the U.S. financial system writ large. This show of support should benefit fintech companies, as there may be fewer hurdles to clear as they continue to grow and expand into new markets. This potential for not just the continuation of already strong growth, but also the opportunity for added growth, should leave the fintech group well-positioned for future performance.

While there is much to like, some risks remain for investors to consider as we move forward in the new year. While the odds of these risks occurring are currently perceived to be low, credit concerns, recession risks, and rising interest rates should all continue to be monitored, as any one of these could quickly derail what is setting up to be a favorable environment for the financial sector.

However, the new administration appears to offer owners of financial stocks a lot to be excited about in 2025 and beyond. The combination of proposals and actions taken by the new administration should benefit all companies within the financial sector, some in more ways than others. At Key Wealth, our equity team continually weighs the risks and rewards of these decisions when making our security selections, with the ultimate goal of outperforming the market and generating value for our clients.

For more information, please contact your advisor.