Trump trade sparks biggest financial stock inflow in 2 years: Stock picks from Goldman Sachs – SPDR Select Sector Fund – Financials (ARCA:XLF)

Financial stocks bask in a post-election rally Donald Trumps election victory as investors expect 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 Finance Select Sector SPDR Fund XLF jumped over 5% last week to new record highs, while weekly inflows rose to $1.573 billion – the highest in over two years.

Regional banks in particular were on fire too SPDR S&P Regional Banking ETF KRE skyrocketed nearly 11% and sees $1.09 billion in inflows, marking its biggest inflow 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 market 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 pension schemes to private investment can attract a flow of new capital.
2. Relaxed antitrust rules: A more lenient antitrust stance could trigger increased merger and acquisition (M&A) activity.
3. Reduced SEC monitoring: There is limited clarity on whether the SEC will continue to investigate brokers’ price-fixing practices.
4. Crypto-friendly policies: Financial firms with crypto exposure can benefit from a more favorable regulatory environment and higher prices for digital assets.

Goldman Sachs’ top pick among financial stocks

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

Here they see the biggest potential gains:

• big banks: Citigroup Inc. C, JPMorgan Chase & Co. JPMand Wells Fargo & Co. WFC.
• Consumer finance: Bread Financial Holdings BFH, Synchrony Financial SYFand 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. EVRand PJT Partners Inc. PJT.

Steeper yield curves are expected to boost regional banks

As markets react to potential economic stimulus and reduced regulatory pressure, analysts expect a steepening of the yield curve, which could be a windfall for banks with heavy exposure to fixed-income assets.

About 60% of both regional and large banks’ balance sheets consist of fixed-income holdings, positioning them to profit when 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
• Zion’s Bancorporation ZION
• Truist Financial Corp. TFC
• Huntington Bancshares Inc. HBAN
• Regions Financial Corp. RF
• PNC Financial Services Group Inc. PNC
• Ally Financial Inc. ALLY.

Increase in capital velocity: M&A and trade increase expected

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

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

Investment banks could also see a boost, too Jefferies Financial Group Inc. JEF, Moelis & Co. MC, PJT Partners Inc. PJTand Piper Sandler Companies PEPPER positioned to take advantage of a more active M&A market.

In the alternative asset management area, Carlyle Group Inc. CG, KKR, Apollo, TPG Inc. TPGand Ares Management Corp. ARES expected to benefit from an increase in private equity deals.

Hopes of tax cuts could boost regional banks

Financial stocks are uniquely positioned to benefit from any corporate tax cuts, as 90% of their earnings come from the US and are currently taxed at an average rate of 23%. After the 2017 tax reform cut the corporate tax rate from 35% to 21%, the financial sector saw their effective tax rate drop by 10 percentage points.

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

His biggest tax break recipients include Moelis & Co. MC, American Express Co. AXP, Evercore Inc., Bread Financial Holdings, Piper Sandler, First Citizens BancShares Inc. FCNCA, Synovus Financial Corp. SNVand Western Alliance Bancorporation WAL.

Insurers benefit from steeper curve, P&C pricing

The insurance industry also stands to gain under Trump’s pro-business policies. Ramsden expects potential increases in claims costs, but sees positive momentum for property and casualty prices.

Insurance companies with significant exposure in the US and a favorable position on the yield curve can see tailwinds.

Ramsden’s choices in the insurance area include WR Berkley Corp. WRB, Hartford Financial Services Group Inc. HIGHand The Traveler Companies Inc. TRVwho he believes are better positioned than brokers to take advantage of these trends.

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Image created using artificial intelligence via Midjourney and Shutterstock.