Banks are headed for a significant period of outperformance in the near term as the “Trump Trade” heats up, according to Wells Fargo. The market this week has not only reacted to Saturday’s attempted assassination on former U.S. President and Republican presidential candidate Donald Trump , which bolstered investors’ confidence in his potential election win, but it has appeared to rotate away from megacap technology stocks into small-caps and other cyclical names. Banks made a comeback during the market action, as the Financial Select Sector SPDR Fund , or XLF, is up 3.7% this week — marking the best performance of any industry during this period. Traders also picked up shares of banks this week after a slew of positive second-quarter financial reports from the group, as Bank of America , Morgan Stanley , and Citigroup , among others, posted earnings and revenue beats. “What looked like a ‘pop’ last week has indeed become a rotation, driven by Trump’s polling/policies … Of all the potential moves floated by the 2024 Trump team, we have the greatest confidence in a more business-friendly regulatory environment,” analyst Christopher Harvey said in a Thursday note. The analyst replaced health care with banks in the firm’s recommended sector barbell under the belief the group will outperform under an improved regulatory environment. Harvey added that banks’ macroeconomic backdrop is already improving with the Treasury curve beginning to steepen, the pace of mergers and acquisitions accelerating, and consumer credit in-line with expectations. Bank stocks are trading at a “significant discount,” Harvey noted. He expects the group’s relative price to earnings ratio will rise from about 50% to about 60% in the near term, similar to the post-election boost banks saw in 2016. That kind of move implies roughly 15% of outperformance over the next 1 to 3 months.
