Wall Street is looking forward to less regulation and higher profits

President-elect Trump is likely to put pro-business leaders in charge of key government agencies and ease regulatory burdens. Good news for banks and dealmakers.

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Iinvestors celebrated Donald Trump’s decisive victory in last week’s presidential election, with banks and alternative investment firms among the biggest winners in anticipation of looser regulations.

Goldman Sachs rose 12% in the last three days of the week, and peers such as JPMorgan, Citigroup, Morgan Stanley and Bank of America, as well as private equity giants KKR and Apollo all gained at least 7%. The gains extended to smaller banks, with the KBW Regional Banking Index rising 10% in the period as financial conditions helped fuel the S&P 500’s 3.7% gain in the last three days of the week to a new record high.

The reaction was one of jubilation and hope that Trump will fill his cabinet with a Treasury secretary sympathetic to Wall Street and replace stricter regulators at agencies such as the Securities and Exchange Commission and the Federal Trade Commission. Trump’s victory, along with a likely Republican Congress when all the votes are counted in close House races, also makes it more likely that the generous corporate tax cuts he passed in his first term will be extended when they expire at the end of next year .

“It’s a fairly heavily regulated industry and to the extent that you get the government off your back a bit, that will be positive,” says Stephen Biggar, director of financial institutions research at Argus.

Banking regulations have been tightened significantly around the world since the global financial crisis, part of a framework put in place by the Basel Committee on Banking Supervision in an attempt to reduce the risk of insolvency and bank failure. The so-called Basel III Endgame rules, set to take effect next summer, initially raised big banks’ capital requirements by 19%, but after fierce opposition from industry leaders, JPMorgan CEO Jamie Dimon called many of the rules “flawed and ill-calibrated” – the Federal Reserve scaled the increase back to 9% in September. Now, Citigroup CEO Jane Fraser said Friday in a CNBC interview that she expects the requirements to be eased further.

“I see this as a tipping point to turn the page for banking regulation. The post-global financial crisis period is now over,” said Mike Mayo, a longtime banking analyst at Wells Fargo. “The pendulum had already started to swing back, but now it’s likely to swing even more left.”

Easier capital requirements will help banks make more loans and earn more interest, and an expected increase in M&A activity will also boost capital markets profits for Wall Street’s biggest investment banks. Total M&A activity fell 17% in 2023 to about $3 trillion in deal volume, and while it’s up a bit this year, it’s still far from the peak investment banking divisions hit in 2021.

Private equity firms and acquisition-hungry companies were already gearing up for a big 2025, when interest rates are expected to fall. PE firms worldwide have $2.6 trillion in dry powder ready to be tapped, according to S&P Global, although another Trump administration carries some risk. Bond yields have already risen since the election as investors expect deficits to remain high if tax cuts are extended and Trump’s threat of tariffs could push prices back up and bring back inflation and higher interest rates.

“If there are unusually large tariffs, tax cuts, deficits or other moves that push interest rates too high, that can derail the rally in a hurry,” says Mayo. “If they put populism over economics, the markets are likely to react very quickly to that.”

High interest rates have been the primary culprit for the downturn in the past two years, but bankers and politicians have also pointed the finger at Federal Trade Commission Chairman Lina Khan. Celebrated by progressives like Bernie Sanders and Alexandria Ocasio-Cortez for challenging corporate monopolies, Khan has been vilified by conservatives for rejecting deals and overseeing lengthy reviews.

SEC Chairman Gary Gensler, nominated by Joe Biden in 2021, is another target of Trump’s ire. The SEC has adopted dozens of new rules under Gensler’s leadership on topics such as ESG reporting requirements and stricter SPAC disclosures about sponsor compensation and conflicts of interest. Trump’s promise to fire him was also applauded by crypto evangelists, as Gensler has taken a hard line on digital assets, including lawsuits against exchanges Coinbase and Kraken.

“We may see stricter adherence to generally accepted SEC registration statement review deadlines, which for many years had generally been up to 28 days for an initial filing review and two weeks or less for subsequent filings,” says Christian Nagler, capital markets partner at Kirkland & Ellis. “Over the past few years, these periods have at times become longer.”

As for the IPO market, which has also slowed since 2021, Nagler notes that the number of IPOs has increased in the last four years immediately following a presidential election year, regardless of who wins, and the market seems to expect more of the same next year. The SPAC market has already started to pick up this year, with 46 IPOs so far in 2024 compared to 31 in all of 2023, according to SPAC Insider Data— Still far from the 613 offerings in 2021 at the height of the SPAC bubble, many of which fared poorly. Some of the splinter SPACs are still among the 95 blank-check companies currently seeking acquisition targets.

“That was the 500-year flood number, and nobody wants to go back to that … somewhere between 80 and 120 (per year) is probably a healthy SPAC market,” says Kristi Marvin, founder and editor of SPAC Insider. “Many sponsor teams want to IPO now in anticipation of a better deal-making environment in 2025.”

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