As expected, President Donald Trump issued executive orders Friday to revise the rules that implement the Dodd-Frank Act and instructed the Department of Labor to stop implementing the new fiduciary rule.
While no rules are being formally changed or blocked, Trump is asking the Treasury Department and regulators to draft revisions to these rules.
Stocks in the financial sector reacted positively on Friday, with Morgan Stanley moving up about 5.5% and Goldman Sachs roughly 4.5%.
The Dow Jones industrial average traded up about 0.8% at about 20,050, while the S&P 500 moved up 0.6% near 2,295. The Financial Select Sector SPDR (XLF) moved up roughly 2% to trade at $23.70.
Trump held a meeting with a group of high-profile business leaders at the White House early Friday, including Elon Musk, Jack Welch, EY Global’s Mark Weinberger and Stephen Schwarzman of the Blackstone Group.
Speaking on Fox Business TV after the meeting, which included talks on corporate tax reform, anchor Neil Cavuto said the stock market has performed very well since Trump’s election. “Are they frothy?” Cavuto asked. Schwarzmann replied with a twinkle in his eyes: “A lot of people have been buried trying to answer that question.”
Boosting the outlook for financial firms are expense cuts tied to deregulation, revenue growth resulting from this rollback and tax reform.
In January, KBW analyst Brian Kleinhanzl shared his views on the effect these three shifts could have on the profits of major banks and financial firms, like Bank of America and Wells Fargo.
He estimates between 24% to 38% upside to earnings in 2018 for the rollback, along with related growth in the economy and lower taxes. “We believe that [the large] banks can be big beneficiaries of less regulation, and we include a 5% expense reduction in our estimate and significant increases in trading and investment banking income."
For instance, expense cuts alone from deregulation could boost earnings at Morgan Stanley and State Street by about 11-13% next year. Revenue growth could add another 7% or so to Morgan Stanley and Bank of America. And tax reform means 10-19% further earnings upside for most large banks.
The KBW analysts caution that the drop in regulation “may come at a cost,” however, as Republican proposals to amend Dodd-Frank “would require much higher capital levels at the biggest banks.”
These costs, they add, are not factored into the “Blue Skies” analysis.
As for DOL, many financial firms “have already taken steps and adjusted fees to restructure their businesses to comply with the rule,” according to equity analysts with Keefe, Bruyette & Woods in a report on Friday. The KBW team remains skeptical over how many of them “will reverse course simply because such a reversal may look like the firm is putting its interests ahead of its customers.”