It’s been a wild month for US banking stocks, which have rallied sharply since Donald Trump’s victory. So how can investors position themselves in the sector amid a potentially dramatic change in the business and regulatory environment?
After facing years of headwinds, US financials have been riding a wave of optimism. Since the election, the S&P 500 Banks Index has climbed by 17% through November 30.
Investors are beginning to believe that the new administration will usher in a new golden era for banking, which could foster robust earnings growth in the coming years. Several positive forces are likely to support the sector, including:
- Faster economic growth. The Republican sweep suggests that meaningful legislation is likely to be passed early in the Trump presidency. Lower corporate taxes and a fiscal spending boost are both on the agenda—and could fuel substantial economic growth. For investors, banks are pure plays on faster growth in America.
- Higher interest rates. Pivoting from monetary to fiscal stimulus could accelerate a rise in interest rates from historic lows. The Fed’s rate hike in December is likely to kick off a series of rate moves through 2017, in our view. Banks benefit most from rising rates, which increase their earnings from lending and investments.