By Mark Conrad, portfolio manager at Algebris Investments
The KBW Nasdaq Bank index was up 10% in the week following the US election, with smaller banks climbing even higher.
A more favourable regulatory environment is driving this positive momentum given Trump will be able to quickly remove the leadership of numerous agencies.
It is expected that new regulatory leaders will be more open to M&A, including at the regional bank level, marking a stark contrast from recent years of limited deal activity.
The Basel III Endgame proposal will also likely be watered down from its original form if not scuttled altogether. While it is unclear what a finalised rule may look like, reduced risk-weighted asset inflation could lead to increased capital returns over the coming years.
In addition to regulatory relief, the bull case on US banks assumes Trump’s policies will increase economic growth, leading to higher loan demand alongside continued benign credit costs. A steeper rate curve should also support interest income, as lower rate assets roll off into higher-yielding loans and securities.
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While these tailwinds may materialise, it is difficult to discern the magnitude of earnings improvement they will drive. During Trump’s first term, the government’s appetite to cut taxes was clear and the corporate tax rate fell from 35% to 21%, leading to over 20% earnings-per-share accretion for many banks.
Even if the rate is lowered further from 21% to 15% as Trump hopes, this represents a mid-to-high single digit increase to earnings estimates – a third of the impact of his first corporate tax cut. It was also expected that Basel III would be watered down, so some benefit has likely been priced in.
Before the post-election rally, banks had moved higher following the June presidential debate without a matching increase in estimates. As such, using 2026 estimates, the price-to-earnings multiple of the BKX has increased by nearly 40% on average since mid-June. Throughout the year, we have noted these positive catalysts and positioned ourselves in numerous potential beneficiaries such as those likely to be M&A targets and supported by asset yield repricing.
However, given the swiftness of this move and good news already priced in, we have since trimmed our exposure. While we acknowledge momentum may continue and retain certain positions, we are rotating away from some holdings to find value elsewhere, including in US life insurers and European banks.
See also: Will bond yields stay higher for longer?
Life companies in the US are analogous to European banks for three reasons. They are beneficiaries of higher rates and the stocks have been ignored for a decade post the global financial crisis, leading to attractive valuations. Balance sheets are also strong and capital return is significant, with payout yields in the 10-15% range.
If there is one key takeaway from the incoming Trump administration, it seems clear inflation will rise through a combination of fiscal stimulus, an immigration crackdown, increasing use of tariffs, and animal spirits.
The USD market-implied inflation has moved higher following the election results, which is positive for life insurers as higher nominal rates across the curve are supportive of spreads, earnings power, sales, and balance sheet strength.
Unsurprisingly, US life stocks jumped on the election result. They remain cheap, with price-to-earnings multiples in the range of four to eight times and free cash flow yields in double digits. We continue to build our exposure in this space opportunistically and expect a re-rating could occur in the next 12 to 18 months.
In Europe, the economic implications of Trump’s victory are less clear-cut. The market’s initial reaction was cautious, with future rate expectations dipping on the outcome.
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Trump’s previous commentary on the European auto industry and the broader topic of tariffs raises risks for Germany, where the economy is already under pressure.
However, if Trump delivers his promise to end the war in Ukraine, a successful peace deal could provide economic tailwinds via lower energy prices and investment associated with reconstruction.
A more optimistic take is that Trump’s victory could galvanise European politicians to deliver meaningful integration and economic reform to secure the bloc’s future growth. Over 2024, we rotated away from the most rate-sensitive names.
We have focused on more diversified firms like Barclays, where certain business lines are better placed for a falling rate environment (such as investment banking and credit cards) and valuations remain undemanding (0.7 times price to tangible net asset value).
However, even as rates fall to 2%, some of the most rate-sensitive names can sustain double-digit returns and distribution yields. Assuming rates at these levels, many European banks still trade at five to six times their 2026 forecasts.
Risk-reward in this space remains attractive, with excess capital, strong distributions, hedged balance sheets, and valuations that sit 30 to 40% below historical norms on both an absolute and relative basis.
