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Beyond Banks: Financials Stocks and Trump

Since Trump’s win we’ve been closely watching US Financials. We see this sector as a major beneficiary of his policies. Financials’ Q4 results for the sector have been strong so far this season and ETF investors are responding. While banks have benefitted, we believe investors should look at the broad Financials sector offers a compelling opportunity.

3. Februar 2025 4 min read

Rebecca Chesworth

Senior Equity Strategist

A breakdown of the sub sectors comprising the Financial Services sector

Global Equities Beyond the Inauguration

Our new Sector & Equity Compass addresses market sectors that could respond well to the new Republican administration. The US Financials sector is a key opportunity.

Looser regulation, including less regulatory oversight, is the likely bedrock of Trump’s policy agenda. This could produce more technological innovation and more merger & acquisition (M&A) activity, both of which are likely to benefit financial services and capital market businesses. A general rise in business optimism in the US in recent months is also supportive of financial transactions and demand for financial products, such as loans and insurance.

The rise in the stock market to record levels since the inauguration is both a reflection of investor confidence and a likely catalyst for further optimism, in particular driving increased profitability for asset managers. Looser fiscal policy, including an extension of the Tax Cuts and Jobs Act of 2017 is likely. Trump has expressed a desire to cut corporate taxes to 15%, which would spur business investments and further stock market growth.

Insurance stocks have so far responded positively to the new administration. Several companies have had notable gains since the election, likely driven by expectations of a more business-friendly environment and a period of firm pricing.

Solid Q4 Earnings Results

ETF investors are responding to the positive outlook. As we mentioned in our Insights piece in November, inflows to US national and regional bank and Financials ETFs surged after the election, being redirected from defensive sector exposures.

Since the start of his year, a further $2.5bn has flowed into US-domiciled and UCITS Financials ETFs combined¹. These flows reflect expectations for the Trump presidency as well as Q4 earnings.

To date in the earnings season, 29 Financials companies have reported and Q4 earnings are impressive. Only one stock has missed earnings expectations and the vast majority have beaten expectatons². Amongst the stellar reports are the world’s largest asset managers and Wall Street banks including BlackRock, JPMorgan Chase, Citi, and Goldman Sachs Group. Financials has seen the highest upgrades of all sectors on 1 and 3 month basis³. This positive sentiment reflects the slower-than-anticipated fall in US interest rates and steepening of the bond yield curve as well as significant volumes on financial markets.

Broader Than Banks

Many of these positive drivers relate to banks — but we see advantages of investing in the broad Financials sector.

Financials has achieved higher returns than Banks alone over 3, 5 and 10 years, producing annualised returns over the decade of 12.3% vs 11.4%. Furthermore, this has been achieved with much lower volatility⁴. Banks are prone to bigger swings in sentiment and variability of earnings than the Financials sector as a whole. According to Bloomberg, 90-day volatility of returns is 17.2% for Financials versus 26.4% for Banks. 360-day volatility is 14.0% vs 21.6%. Amongst the reasons for non-bank Financials to benefit in the future:

Potential actions by President Trump
We believe that some of Trump’s mooted policies, particularly tax cuts and deregulation, could be beneficial across the sector. We expect earnings upgrades resulting from lower operational costs to all the industries shown in the Figure 1.
Benefit of Dynamic Financial Markets
Volatile investment markets are positive for volume-sensitive brokers and exchanges (classified as Capital Markets). Meanwhile, bullish equity markets are feeding through to aum and fees in asset and wealth management (also in Capital Markets) and parts of insurance businesses.
If there is a pick-up in corporate activity, it would be a boon to investment banks (in Banks & Capital Markets). Increased interest from private equity in the life and annuity sector could lead to more M&A activity in the Insurance industry.
Exposure to US Consumer Wealth
Demographic trends suggest continued structural growth in demand for savings and investment products as accessed through asset managers, insurance providers and banks. Insurance is showing good organic momentum in annuities, benefits, pension transfers, wealth, and reinsurance. Meanwhile, recent earnings results show payment providers are trading strongly, benefiting from record retail transactions as well as data processing.
Interest Rates
Banks may appear most exposed to interest rate expectations but the correlation to US 10-year Treasury yields is similar for Banks and the whole Financials sector, as shown in the Sector & Equity Compass. Life, as well as property and casualty insurance, can benefit from higher investment income with high rates.
Fintech Growth
Rapid growth in fintech continues to challenge banks for the supply of new loans and may need acquisitions. One way to get exposure to fintech now is through financing activities of investment banks.
AI Adoption
AI will continue to be an important theme for equity investors and AI deployment offers huge opportunities to financial companies with their legacy tech, significant customer bases and legal requirements. The whole sector is ripe for operational cost savings on administrative tasks with adoption of AI technology. Insurance companies appear to be at the forefront as early adopters.
Breadth of Financials
Berkshire Hathaway (12% of the sector) is almost in a league of its own given its activity and renown of its leader. As a conglomerate, it has diverse income streams, the main ones being across energy and insurance. Higher interest rates have reduced the pressure of holding cash whilst awaiting the next acquisition.

Of course, there are downside risks – Trump may be too lax in his deregulation, looser policies may be too dovish, or a harsh tariff regime is announced. This could spark a reacceleration of inflation, a slowdown in economic growth or reduce consumer confidence, with bad news impacting the sector’s performance. And, as we saw last week with the response to DeepSeek’s AI news, investment shocks can occur.

But overall, buying the whole sector gives diversification, access to more performance drivers, and could produce better risk-adjusted returns.

How to invest in US Financials:

Footnotes

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