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        Weekly ETF Brief

        Financial Stocks: Banking on Trump

        Of the Trump Trades we have observed since the election, US Financials appears particularly interesting, and merits deeper analysis of the factors driving both performance and flows.

        4 min read
        Rebecca Chesworth
        Senior Equity Strategist

        Better than all the Rest (YTD)

        Financials is the best performing US sector this year, up 34.5%.1 A large part of this total net return has been achieved since Donald Trump won the US presidential election, which was compounded by the full red sweep. Financials is the second-best performing sector since then, beaten only by Consumer Discretionary (where Tesla has accounted for half of the sector return in this period).

        Strong performance has been seen across the Financials sector, with all but 3 of the 72 stocks higher. The largest contributions from the big diversified banks (led by JPMorgan, Bank Of America, Wells Fargo) and Warren Buffet’s Berkshire Hathaway. Nevertheless, consumer payment companies, such as Visa, and insurance providers, have also been cheered.

        Largest Inflows Since the Election

        Inflows to US national and regional bank and Financials ETFs have surged since the election, with a total of $9bn into this category in ETFs domiciled in in the US, Europe and elsewhere. This is the largest addition for any sector and is a significant pickup from previous months as shown below. Another indicator of bullish sentiment is the sector’s put/call volume ratio, which is at one year lows. Money appears to be coming from more defensive sector exposures, as well as from other assets.

        It represents another part of the diversification trade being seen most obviously with the strong buying of US small and mid-cap equities.

        Trump Trade: Déjà Vu all over Again?

        Part of the investor response is copycat action from 2016. Looking back to the first Trump presidency, Financials rose sharply after election day and maintained a relatively strong performance until a year into the administration, with a particularly favourable boost from the Tax Cuts & Jobs Act (TCJA).

        Trump made it clear in his 2024 campaign trail that corporate tax cuts, as well as deregulation, would be early actions from his new administration. For this reason, we ranked the sector very highly in our recent post-election analysis.

        We see the following potential actions as beneficial under the Republican administration starting in January 2025.

        • Deregulation – amongst expectations are more business-friendly policies and lighter touch antitrust actions. Any weakening of the Basel III “endgame” requirements on regulatory capital is also important to US banks. However, as with other current discussions and ongoing litigation, the outcome rests on who leads the Federal Reserve and other financial agencies, including the Consumer Financial Protection Bureau.
        • New leadership of the major authorities would allow more innovation and use of emerging technologies, expectations of which are already being seen in the reaction of crypto prices., There could be more M&A activity, which would be a blessing to investment banks. Overall, looser regulation and reduced oversight would likely be taken positively by financial services and insurance companies as well as banks as operational costs could fall. We should consider the scenario may offer short-term cost savings but it could increase systemic risk and lead to long-term instability. Only last year several regional banks collapsed with early regulatory changes partly blamed. Helpfully, the 2024 stress test by the Fed showed all 31 banks included could withstand a severe recession while maintaining more than the minimum required capital levels
        • Tax — the TCJA will expire at the end of 2025 and investors are hoping for an extension of many of the measures for individuals and corporates. The decision on domestic corporate earnings is important to earnings per share figures for this sector. Meanwhile, higher earnings growth in other areas could increase demand for banking and insurance products. However, expectations may need to be tempered by the US’s huge budget deficit and spiralling servicing costs which could limit some of the fiscal ambitions
        • Tariffs — there should not be as much disruption to Financials from trade policies and tariff hikes as with other sectors because of its significant domestic exposure.
        • Economic implications — all three of these policy areas have feedback loops to the strength of GDP growth. Together with business confidence and wage growth, this could positively or negatively impact demand for bank loans and other financial products, as well as the ability to pay for them. So far the equities market seems to be assuming higher economic growth.
          The direction of interest rates and the shape of the bond yield curve are also important to banks, impacting their net interest income margins. Inflation is important to insurance regarding the costs of claims, and thus margins, especially in sensitive lines like property and casualty.

        Flows into US Financials ETFs Show a Significant Spike Since US Election Day ($m)

        Chart shows how US financials have spiked since the election

        How to invest in US Financials

        More on Weekly ETF Brief

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