Earlier this month, when US President elect Trump rang the opening bell on the New York Stock Exchange, Wall Street executives such as Goldman Sachs CEO David Solomon and Citigroup CEO Jane Fraser were also invited to watch. A few minutes before the bell rang, cheers erupted from the crowd.
As 2024 draws to a close, there are indeed many things worth celebrating for these Wall Street giants: they have finally emerged from the slump of the previous two years, with both market trading and investment banking businesses recovering at the same time; The level of interest rates in the United States is much lower than a year ago; As the Trump 2.0 era begins, banking regulation will also be relaxed again; Wall Street executives' year-end bonuses are also expected to increase.
Is this year's upward trend just the beginning?
Among all investment banks, Goldman Sachs has particularly benefited from these changes. Goldman Sachs heavily relies on Wall Street centered investment banking, trading, and wealth management businesses. Since Trump's election, Goldman Sachs' stock price has soared, with a cumulative increase of 50% in the past 12 months. But Goldman Sachs is not the only investment bank with soaring stock prices. The KBW Bank index, which tracks the overall trend of US banking stocks, has risen by about 32% so far this year. Since the election, as of last Friday, the stock prices of JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Morgan Stanley have all risen by 5% to 12%.
JPMorgan CEO Jamie Damon said after Trump's victory, "For many bankers, this news has made them dance and ecstatic." JPMorgan is one of the best performing banks on Wall Street this year. Analysts predict that the bank's investment banking revenue will increase by 45% in the fourth quarter.
More importantly, some markets and industry insiders predict that this year's rally is just the beginning, and US banking stocks are expected to replicate the prosperity of 1995 in the upcoming 2025. At that time, then Federal Reserve Chairman Greenspan significantly reduced interest rates, causing a soft landing for the US economy. Former President Clinton also relaxed regulations on the banking industry and signed a federal law in 1994 that lifted restrictions on banks opening branches across states, laying the foundation for a period of consolidation that ultimately gave rise to banking groups such as JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup with businesses spanning the East and West coasts of the United States. Under various favorable conditions, the KBW Bank Index rose over 40% overall that year, significantly outperforming the S&P 500 Index, and continued to outperform the market for the next two years.
Mike Mayo, an analyst at Wells Fargo, said, "History is unlikely to repeat itself, but it may rhyme." He said he doesn't expect bank stocks to be as good as that "mysterious year" next year, but he does see many similarities. According to his analysis, during the three historical rate cut cycles (1995, 1998, and 2019) in which the Federal Reserve cut interest rates without causing an economic recession, bank stocks initially experienced selling after the first rate cut, but began to rebound in the following weeks, outperforming the S&P 500 index.
Barclays Bank analyst Jason Goldberg believes that "the election results will translate into bank earnings, and the market is pricing this optimism, betting on further recovery of bank stocks
This year, the investment banking revenue of major Wall Street banks has increased, ending a two-year drought period. According to data from Dealogic as of December 17th, the investment banking revenue of major banks is expected to reach the third highest level in the past decade in 2024. Although still below its peak in 2021, Solomon predicts that investment banking business will continue to rebound next year as more transactions proceed and the new US government simplifies merger approval procedures. At a media conference this month, he said, "By 2025, our investment banking business will definitely reach, and may even lead, the 10-year average
Will regulation be relaxed in the Trump 2.0 era?
Wall Street also has high hopes that the Trump 2.0 era will lower the capital rules proposed in the US version of the Basel III Accord. Last year, during the drafting and voting of the proposal, the US banking industry consistently resisted opposition, even suggesting that if regulators did not act according to their wishes, they would initiate a class action lawsuit. In September of this year, the banking industry achieved a preliminary major victory, and regulatory authorities have stated that they will lower the capital requirements in the proposal.
Bankers expect the new government to re-examine these regulations once again. Goldberg said that if Trump's first term stance is taken as a reference, the capital growth requirements of major banks will be reduced to at least 9% after the September cut, and may even not increase at all.
In addition, due to the rebound in performance, Wall Street is expected to welcome its first bonus increase since 2021. According to Johnson Associates, a compensation consulting firm, the bonus for bond underwriting professionals should be 35% higher than last year, while the average bonus for stock underwriting professionals in listed companies should increase by 15% to 25%. Traders will also receive a bonus increase of around 20%. Due to the slower recovery of M&A business compared to other businesses, the bonuses for related personnel are expected to be lower than those for other business personnel, increasing by 5% to 10%.
Christopher Connors, head of Johnson Associates, said, "Overall, we expect investment bank year-end bonuses to be the second best in the past five years, but in absolute dollar terms, they have not returned to the glorious period of 2021. However, the situation is still better than the previous two years, with investment bank year-end bonuses remaining flat or even declining last year
Of course, there are still many uncertainties that may affect bank stocks. Some economists are concerned that Trump 2.0's policies of increasing tariffs, lowering taxes, and expelling undocumented immigrants may reignite inflationary pressures in the United States, causing interest rates to remain high for a longer period of time and pushing up bank financing costs. In addition, some market participants believe that even if interest rates decrease, the impact on the banking industry will be mixed. Allen Puwalski, Chief Investment Officer and Co Portfolio Manager of Cybiont Capital, said, "Investment banking businesses that will benefit from high interest rates may gain less profit as a result, while some other businesses will benefit from low interest rates. We cannot yet determine whether the formula this time is completely the same as in 1995
But Wall Street executives are quite optimistic. Bank of America CEO Brian Moynihan stated at an investment conference last month that he has full confidence in the US economy under the Trump administration and hopes the new government will take immediate action.