Earlier this month, as the newly elected President of the United States rang the opening bell at the New York Stock Exchange, a notable gathering of Wall Street executives, including Goldman Sachs CEO David Solomon and Citigroup CEO Jane Fraser, were invited to witness the occasionJust moments before the bell rang, the crowd erupted into cheers, signaling optimism and jubilance.

As 2024 draws to a close, Wall Street's leading financial institutions have considerable achievements to celebrateAfter two years of stagnation, major banks are witnessing a resurgence in market activity across both trading and investment banking sectorsInterest rates in the United States have fallen significantly compared to a year ago, easing some of the financial pressures that had been felt across the industryAdditionally, there seems to be a prevailing sentiment that regulations will be relaxed once again, which is a boon for bank executives who are also set to see an increase in their year-end bonuses.

Could this year's recovery merely be an initial step towards an even larger upturn?

Among the numerous investment banks, Goldman Sachs finds itself particularly well-positioned to take advantage of these shifting dynamics

The firm relies heavily on its investment banking, trading, and wealth management services—primarily centered around Wall StreetOver the past year, Goldman Sachs stock has surged, gaining approximately 50%. However, it is essential to note that they are not the only firm experiencing robust stock performance; the KBW Bank Index, which tracks the collective performance of U.Sbank stocks, has also seen a remarkable increase of around 32% this yearBy last Friday, shares of major banks like JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Morgan Stanley had seen gains ranging from 5% to 12%.

JPMorgan CEO Jamie Dimon noted the excitement among bankers, declaring that the recent developments have left many in the occupation exuberantJPMorgan has performed exceptionally well this year, and analysts predict that the bank's investment banking revenue could witness a staggering increase of 45% in the fourth quarter alone.

Importantly, several market insiders anticipate that this year's market upswing is just the beginning

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There are projections that U.Sbanking stocks could witness a renaissance echoing the prosperity of 1995. That year, the Federal Reserve, under Chairman Alan Greenspan, significantly reduced interest rates, resulting in a soft landing for the U.SeconomyPresident Bill Clinton also eased regulations on the banking industry, enacting a federal law in 1994 that eliminated restrictions on banks opening branches across state linesThis pivotal moment laid the groundwork for the consolidation that eventually resulted in significant banking groups, such as JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup, traversing the U.Sfrom coast to coastBack then, the KBW Bank Index rose over 40%, dramatically outperforming the S&P 500, and continued to gain traction for the next two years.

Mike Mayo, a banking analyst at Wells Fargo, suggests that while history may not repeat itself, it could “rhyme.” He doesn’t expect the market for bank stocks to mirror that of the “mysterious year,” but he certainly sees many parallels

Through his assessments, in the past three interest rate reduction cycles—1995, 1998, and 2019—bank stocks initially faced selling pressure post-rate cut but rebounded in the following weeks, outperforming the S&P 500.

Barclays analyst Jason Goldberg believes that the optimism is starting to be priced into the market, with expectations that this will translate into enhanced bank profits in the near future“The market is betting on further recovery in bank stocks,” he stated.

This year, Wall Street's investment banking revenue has experienced an uptick after a prolonged two-year “drought.” According to data from Dealogic as of December 17, 2024, the investment banking revenue for big banks is set to reach its third-highest level in the last decadeEven though these figures fall short of the record peaks of 2021, Solomon forecasts a strong recovery in investment banking activities for the upcoming year, anticipating an increase in deals and a more streamlined M&A approval process under the new administration

During a recent media call, he asserted, “By 2025, our investment banking operations will surely meet, if not exceed, the ten-year average.”

Wall Street is also looking forward to potentially relaxing the capital requirements proposed in the U.Sversion of the Basel III frameworkLast year, the banking industry resisted this proposal during the drafting and voting phases, even hinting at collective lawsuits if regulators did not align with their wishesIn September this year, the banking sector achieved a significant initial victory as regulators indicated they would lower the capital requirements in the proposal.

Bank executives expect the new administration to reevaluate these regulations once moreGoldberg mentioned that the required increase in capital could fall to a minimum of 9% following the adjustments made in September, with a chance that there would be no increases at all.

Additionally, as a result of improved performance, Wall Street is likely to see bonuses rise for the first time since 2021. Data from compensation consulting firm Johnson Associates indicate that bonuses for bond underwriting professionals could increase by 35% over last year, while the average bonuses for equity underwriters in publicly traded companies are expected to grow by 15% to 25%. Traders can anticipate a bonus increase of around 20%, albeit those in M&A who are experiencing a slower recovery may only see an increase of 5% to 10%.

Christopher Connors, head of Johnson Associates, stated, “Overall, we expect this year’s investment banking bonuses to be the second-best in the past five years, although, from an absolute dollar standpoint, they have yet to return to the highs of 2021. However, this is a marked improvement compared to the previous two years when bonuses stagnated or even declined.”

That said, there remain uncertainties that could affect bank stocks moving forward

Several economists express concern that policies aimed at raising tariffs, cutting taxes, and expelling undocumented immigrants could reignite inflationary pressures in the United StatesSuch shifts might keep interest rates higher for an extended period, increasing banks' financing costsMoreover, some market participants argue that even with lower interest rates, the impact on the banking sector could be mixedAllen Puwalski, Chief Investment Officer and co-Portfolio Manager at Cybiont Capital pointed out, “The investment banking sector may earn fewer profits due to high rates, while some other areas might benefit from low ratesWe’re yet to verify if the current combinations yield outcomes similar to those seen in 1995.”

Nonetheless, many Wall Street executives are optimistic about the futureBrian Moynihan, CEO of Bank of America, expressed confidence in the American economy under new leadership during an investment conference last month, urging the new administration to “act promptly.”