Republican Election Win Largely Positive for Capital Markets and Investment Services Firms

We believe the election of Donald Trump as US president and Republican control of the Senate and House will be largely positive for capital markets and investment services firms. We will adjust our valuation models as government policies solidify, but with a rally of over 10% for multiple capital markets companies after the election, we believe potential tailwinds have largely been incorporated into share prices. We view most capital markets and investment-services firms as fairly valued to slightly overvalued.

The Republican Party has historically been more friendly to mergers than the Democrats. Investment banks in general (and M&A-focused banks like Evercore EVR and Lazard LAZ especially) will benefit from higher M&A volume. Equity underwriting should remain strong as long as the stock market holds up, while there’s more uncertainty around fixed-income underwriting with the yield curve steepening.

A likely steepening yield curve should add to net interest income. The Federal Reserve is cutting rates on the short end, and the 10-year US Treasury yield is picking up after the election, as the market is pricing in likely higher inflation in the long term. While the Fed should continue to cut interest rates, the market is pricing in a more gradual pace of cuts, which benefits some companies with a relatively higher proportion of interest-earning assets tied to short-term interest rates.

If the stock market can hold on to recent gains—especially if the market continues to trend upward—wealth management and retail brokerages should report new records in client assets, which are the foundation of earnings growth.