Financial stocks then bask in a post-election rally Donald Trump‘s election victory as investors anticipate a friendlier regulatory landscape for banks, brokers and consumer finance companies.

With expectations of deregulation and possible tax cuts, traders are pouring into financial services at levels not seen in years.

The Financial Institutions Select Sector SPDR Fund XLF rose more than 5% last week to reach new record highs, while weekly inflows rose to $1.573 billion – the highest in more than two years.

Regional banks in particular were on fire SPDR S&P Regional Banking ETF KRE skyrocketing nearly 11% with an inflow of $1.09 billion, the largest inflow of money since March 2023.

Key drivers: Deregulation and tax cuts fuel investor optimism

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

Richard Ramsden, an analyst from Goldman Sachs, emphasized that “the market is taking into account the potential for changes to some proposed regulations, an increase 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 pension plans to private investment could attract a flood of new capital.
2. Relaxed antitrust rules: Milder antitrust policies could lead to more mergers and acquisitions (M&A).
3. Reduced SEC oversightThere is limited clarity on whether the SEC will continue to investigate brokers’ sweep pricing practices.
4. Crypto-friendly policies: Financial companies with exposure to cryptocurrencies can benefit from a more favorable regulatory environment and higher prices for digital assets.

Goldman Sachs’ best picks among financial stocks

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

This is where they see the biggest potential profit:

• Big banks: Citigroup Inc. c, JPMorgan Chase & Co. JPMAnd Wells Fargo & Co. WFC.
• Consumer finance: Bread Financial Holdings BFH, Synchronous financial SYFAnd Capital One Financial Corp. COF.
• Capital markets: Blackstone Inc. BX, Apollo Global Management Inc. APO, KKR & Co. Inc. KKR, LPL financial holding companies LPLA, Tradeweb Markets Inc. TW, Evercore Inc. EVRAnd PJT Partners Inc. PJT.

Steeper yield curve is expected to boost regional banks

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

About 60% of the balance sheets of both regional and major banks consist of fixed-income investments, positioning them to benefit if long-term interest rates rise.

Ramsden’s picks for banks that will benefit most from a steeper yield curve include:

Regional banks:

• Burgers Financial Group Inc. C.F.G
• 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. ALLEY.

Increase 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 stock markets, creating a strong backdrop for trading activity.

According to Ramsden, big banks love it Morgan Stanley MADAM could be the biggest beneficiaries, while among regional banks KeyCorp KEY And Burgers Financial Group Inc. C.F.G stand out.

Investment banks could also see a boost Jefferies Financial Group Inc. JEF, Moelis & Co. M.C, PJT Partners Inc. PJTAnd Piper Sandler Companies PIPR positioned to benefit from a more active mergers and acquisitions market.

In the field of alternative asset management Carlyle Group Inc. C.G, KKR, Apollo, TPG Inc. TPGAnd Ares Management Corp. ARES are expected to benefit from an upturn in the flow of private equity transactions.

Hopes for tax cuts could boost regional banks

Financial stocks are uniquely positioned to benefit from any corporate tax cuts as 90% of their income comes from the US and is currently taxed at an average rate of 23%. After the 2017 tax reform reduced the corporate tax rate from 35% to 21%, financial institutions 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 biggest benefit.

His top beneficiaries of the tax cut include Moelis & Co. M.C, American Express Co. AXP, Evercore Inc., Bread Financial Holdings, Piper Sandler, First Citizens BancShares Inc. FCNCA, Synovus Financial Corp. SNVAnd Bancorporation of the Western Alliance WAL.

Insurers benefit from Steeper Curve, P&C Pricing Power

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

Insurers with significant exposure to the US and a favorable position on the yield curve could see tailwinds.

Ramsden’s insurance choices include W.R. Berkley Corp. WRB, Hartford Financial Services Group Inc. HIGHAnd The Travelers Companies Inc. TRVwho he believes are better positioned than brokers to benefit from these trends.

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