Regional bank stocks surged on Wednesday, marking their strongest one-day performance in four years as investors bet on a more favorable banking sector environment when Donald Trump returns to the White House.

The SPDR S&P Regional Banking ETF KRE — which tracks a basket of 147 small- and mid-cap U.S. banks — jumped 13.4%, posting its largest rally since November 2020. Back then, the announcement of the first COVID-19 vaccine sparked a broad market rebound.

In Wednesday’s trading, regional banks outshined even the biggest U.S. banks. Financials were the top-performing sector in the S&P 500, with the Financials Select Sector SPDR Fund XLF rising 6%.

Yet regional banks saw an even greater lift, driven by expectations that Trump’s policies will uniquely benefit smaller, domestic-focused institutions.

The strength in regional banks also fueled a broader rally in small-cap stocks. The Russell 2000 index, which includes a significant portion of regional banks, surged 6% as investor optimism spread across smaller, U.S.-centric companies.

Regional banks are the most representative sector of the Russell 2000 index, which soared by 6% on Wednesday.

Chart: Regional Banks Mark Best Day Since Covid-19 Vaccine Announcement

JPMorgan’s Elian Identifies 7 Tailwinds For Regional Banks

JPMorgan analyst Anthony Elian sees multiple factors that could fuel a strong performance for regional banks under Trump’s leadership.

“We view these results as being favorable for the regional bank sector tied to several tailwinds,” Elian wrote in a note on Wednesday.

He highlighted seven main drivers:

1. Increased lending activity – A pro-business and onshoring agenda is expected to boost lending, potentially driving a revival in loan growth across the industry.
2. Lower corporate taxes – Trump’s anticipated tax cuts could enhance profitability for regional banks by reducing their tax burden.
3. Eased regulatory environment – According to Elian, “a second Trump administration would include an easier backdrop for regulation for the industry,” which could help banks reduce compliance costs and expand operations.
4. Uptick in M&A activity – With a favorable regulatory climate, the sector could see an increase in mergers and acquisitions, a trend that was prevalent during Trump’s first term and could benefit mid-sized banks seeking growth.
5. Attractive valuations – Elian noted that regional banks remain undervalued by historical standards, suggesting “there is still material upside on the table.”
6. Steep Treasury yield curve, Fed still in easing mode – With the Treasury yield curve in a steep pattern and the Federal Reserve to keep lowering rates, regional banks could benefit from improved net interest margins (NIMs) and net interest income (NII), boosting their earnings and profitability over time.
7. Underweight positioning – Elian highlighted that investors are still largely underweight on regional bank stocks, indicating room for increased demand as sentiment shifts.

JPMorgan’s Elian identified a few standout names in the regional banking space. Among his top picks are First Citizens BancShares, Inc. FCNCA and Western Alliance Bancorporation WAL, both of which are well-positioned to take advantage of the expected uptrend in the sector.

Trump’s 2016 Win Offers Historical Context For Sector Rally

The market’s optimism is further bolstered by historical precedent. Regional bank stocks were among the biggest early beneficiaries following Trump’s 2016 election victory.

Between Nov. 9, 2016, and Jan. 10, 2017, the KRE ETF surged nearly 20%, significantly outperforming other sectors during that period.

Chart: Performance Of Regional Bank ETF (Nov. 9, 2016 – Jan. 10, 2017)

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Image: Midjourney