Banks needed the right version of Donald Trump to justify their high-flying stock prices. They got the wrong one. The US president’s chaotic and aggressive performance during his first few weeks in the White House has shocked companies, put investment plans and deals on hold and threatens to drag the economy into recession. Finance executives aren’t hitting the panic button yet, but my impression from a string of meetings in New York last week is that bankers are coming to accept that this administration is serious about reshaping the economic and financial landscape.
In his first term, the advice was take Trump seriously but not literally — the second part is no longer true. The transformation he’s planning during his second term will be painful; the questions are how much it will hurt and how long will it take.
The bright spot in next month’s first quarter results will be investment banks’ trading operations. The market volatility sparked by on-again, off-again tariffs and mounting fears of a slowdown has been a boon for equities desks as investors react to an erratic news cycle and seek a more defensive balance to their holdings. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley will reap rewards from this, as could some European names such as UBS Group AG.
The worry is that once portfolio managers have repositioned and taken money off the table, they could sit on the sidelines until the uncertainty of Trump’s scattergun approach subsides. Traders could be left twiddling their thumbs. A more optimistic view — at least for the banks — would see investors continuously reacting to volatile news flow; but experience suggests a wait-and-see approach is likely to be the preferred tactic for many investors.
The other side of investment banking has already hit a wall. Mergers, acquisitions and new stock market listings got off to a slower start than expected in January and even worse than in 2024 — and that was before Trump’s inauguration. Hopes for a boom were high because November’s election seemed destined to turbocharge long-suppressed activity. The big US investment banks clocked 36% average growth in investment banking fees in the fourth quarter of last year compared with the year-earlier period.
Since then, Trump’s tariff flip-flopping and his surprising moves to pick fights with close neighbors and allies have left bosses and private-equity managers confused at best. There’s still a pipeline of pent-up dealmaking and fundraising — private equity firms need to sell long-held businesses — but none of this is getting done until there’s clarity on tariffs, the likely path for interest rates and stable equity markets.
The financial firms that lean more on capital markets and advisory business have thus been among the hardest hit. Shares in Jefferies Financial Group Inc., for example, finished last week 12% below their Nov. 4 price, shedding gains of almost 30% since the start of this year. Listed private equity firms like Blackstone Inc., Carlyle Group Inc. and KKR & Co Inc. are down by even more.
But if investments and deals are just postponed, the real uncertainty for some bankers will stem from the US domestic economy and whether consumers and their spending are going to suffer from a major slowdown or a jump in unemployment. The vaunted slash-and-burn strategy of Elon Musk’s Department for Government Efficiency is a big threat. If millions of federal employees are either sacked or just become worried about whether their job is safe, they aren’t going to book tickets for Disneyland or buy a new car, for example. And beyond direct government employees, there are twice as many contractors in a similarly precarious position.
For the biggest banks that are more focused on wealthier people, a slowdown in spending could cause a little pain, but those firms that lend to riskier borrowers will be harder hit. Capital One Financial Corp., Synchrony Financial and American Express Co. are all down nearly 20% since late February when the closely watched University of Michigan consumer sentiment survey took a nosedive.
The broad KBW Bank Index of US financial stocks finished last week just below its Nov. 4 level, showing that the pain is widespread among financials. That contrasts sharply with the performance of European bank stocks, where a long-lasting rally has accelerated for some names: Deutsche Bank AG, for example, finished last week up 40% on its November price. Badly needed investment in the region’s economy and defense capabilities finally looks set to happen.
Of course, things could settle down: Russia and Ukraine could strike a peace deal, a new framework of tariffs and trade between the US and the rest of the world could be agreed and then the financial world could quickly plug all this into its models and have a clearer view about the values of stock, bonds and currencies. At this point, you’d need to be optimistic in the extreme to think that it will be realized quickly.
The administration is telling finance and business that there’s an uncomfortable transition ahead. The problem for banking and markets is that everyone is finally starting to believe it.
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