Energy & AI Get a Lot of Attention. Don’t Overlook Financials.
TL;DR
Republicans will control all three branches of government in 2025. Investors should expect considerable deregulation regardless of the economic impacts. However, this market sector is poised to profit.
In the wake of the Great Recession, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act — or the Dodd-Frank Act — in an attempt to reign in the unscrupulous practices of financial institutions that resulted in a historic housing crash and sparked a global recession.
That act was the direct result of greed-driven strategies (e.g., subprime lending) and an absence of oversight (aka regulation) for big banks and other lenders.
But if there’s one thing we know about Republicans, they detest regulation. So after a Trump victory and the GOP gaining control of all three branches of the federal government, you don’t need a crystal ball to see what’s coming next.
Looming deregulation will likely have outsized impacts on certain stock market sectors. But with analysts forecasting tempered growth for the S&P 500 in 2025, identifying which sector could benefit the most can be daunting.
2025 Outlook
Earlier this week, Goldman Sachs (GS) released its 2025 Investment Outlook report, which among a litany of other things stated that it expects the S&P 500 to post a gain of 11% next year.
And while that’s a far cry from 2024’s year-to-date 21% gain, growth is growth. But the Goldman Sachs’ report also cited the likely Trump tariffs we discussed last week, stating that the global economy’s “biggest risk is a large across-the-board tariff, which would likely hit growth hard.”
With inherently inflationary tariffs on the docket, the Federal Reserve has already said it’s likely to slow — or stop — the pace of its interest rate cuts. That’s because the central bank expects Trump’s tariffs to increase consumer costs, and thereby inflation, which may require the Fed to once again begin raising rates just after it finally started cutting them.
That’s not just us speculating. On Monday, Forbes reported that three ingredients — tariffs, deportations and low taxes — will combine in a way that makes it difficult for the Fed to fight spiking inflation in 2025 once Trump’s presidency kicks off.
Forbes’ logic was sound:
- Tariffs are proven to increase consumer costs.
- Mass deportations will make labor costs increase, thereby increasing the costs of services.
- And further lowering taxes on the highest-income earners will result in the economy being flush with cash, demonstrating a willingness to pay for increased costs (despite that willingness being isolated to upper-income individuals).
In total, this is likely to cause the Fed to pump the brakes on cuts. The CME FedWatch Tool is already showing a significantly lower likelihood of a rate cut during the December meeting:
However, rates could still go slightly lower in the short term before the need for the Fed to pause or reverse them arises.
But higher rates — now or early in the next Trump administration — coupled with deregulation means more money for lenders, which makes us bullish on the financials sector.
Betting on Big Banks
During Trump’s campaign, he focused considerably on energy (although the U.S. is already the world’s largest producer under Biden) and continued tech prominence, especially in the AI space.
But Trump is already looking to roll back provisions of the Dodd-Frank act (which he also did in 2018), with the goal of alleviating so-called “burdensome regulations” for financial institutions.
And Wall Street is obviously paying attention. Looking at a heat map of the S&P 500’s performance over the past month, you’ll notice that one sector — financials — is far more green than the other 10 sectors:
By no means are we saying that the energy sector (located towards the bottom-right above) is going to struggle under a second Trump presidency. Nor are we saying that Big Tech, which has driven the majority of the market’s gains over the past two years, is going to falter.
But what we are saying is that the tracks have been laid for stocks and ETFs operating in the financials sector to experience a very profitable 2025.
The Proof’s in the Pudding
We’re not recommending any particular stocks today. Investors could probably blindfold themselves and throw a dart at a list of companies operating in the financials sector and produce some profit over the next year.
And while past performance is never indicative of future results, looking at the performances of some of the big names in this sector over the past month — in both the lead-up to and aftermath of the 2024 election — Trump’s deregulatory platform is already proving fruitful:
- Wells Fargo: 15.53%
- Bank of America: 11.28%
- JPMorgan Chase: 9.46%
- Visa: 8.28%
And that’s just over the past month.
But for ETF investors, we will recommend the Financial Select Sector SPDR Fund (XLF). It’s a safer play that provides broad exposure to the financials sector. Rather than putting all your eggs in one basket, it’s weighted to some of the heaviest hitters, including:
- Berkshire Hathaway
- JPMorgan Chase
- Visa
- Mastercard
- Bank of America
- Wells Fargo
- Goldman Sachs
- Morgan Stanley
- American Express
The ETF is trading at an accessible price of $49.59/share and its expenses ratio of 0.09% is 40% lower than the average expense ratio of 0.15% for index equity ETFs.
The XLF pays a modest quarterly dividend of 1.33% and the ETF has gained 5.25% over the past month.