The stock prices of banks and credit card companies fell today after President Donald Trump announced late Friday that credit card companies would be subject to a 10% cap on the interest rates they can charge customers. The President proposed a one-year cap on interest rates starting January 20. The Trump administration is scrambling to address the affordability crisis before this year's midterm elections.
We expect that the banking industry will pop this trial balloon before it takes off. The industry's trade groups issued a joint statement late Friday, making their case: "Evidence shows that a 10% interest rate cap would reduce credit availability and be devastating for millions of American families and small business owners who rely on and value their credit cards, the very consumers this proposal intends to help."
We view today's selloff in financial stocks as an opportunity to buy them ahead of the big banks' better-than-expected Q4-2025 earnings announcements at the end of this week. Here's why there might be upside surprises:
(1) Loan demand rebounded last year. The growth rate of loans and leases at both large and small banks rebounded last year (chart). For large banks, it rose from 0% y/y in April 2024 to 5.7% at the end of last year.
(2) The slope of the yield curve has been steepening since late 2024. The spread between the 10-year and 2-year Treasury yields widened from zero on December 2, 2024 to 64bps at the start of this year (chart). That should have boosted banks’ Q4 net interest margins.
(3) New issuance of bonds and equities soared during the last few months of 2025. Over the past 12 months, through November, such issuance totaled $2.5 trillion (chart). That boosted investment banking fees, especially during the second half of last year.
(4) Loan loss reserves started to fall late last year. Allowances for losses on loans and leases edged lower at the end of last year among the large banks (chart).
(5) Payroll employment was flat last year at a record high. With no headcount growth in the financial industry last year, productivity growth must have been strong (chart).
(6) The forward earnings of the S&P 500 Diversified Banks industry is at a record high. The group's forward P/E is relatively low at 13.7 assuming that the Trump administration deregulates the industry as promised (chart). Then again, imposing a 10% cap on credit card fees would be an onerous new regulation.
(7) The forward profit margin of the S&P 500 Diversified Banks industry has been widening. It rose to 27% late last year from 24% a year ago (chart).
(8) The Financial sectors of the S&P 400 and 600 stock price indexes are poised to rise to new highs. The S&P 500 has been rising to new highs since late last year (chart).
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