Why Financial Stocks Like American Express, Synchrony Financial, and Huntington Bancshares Rocketed Higher Today

Shares of bank and credit card stocks, such as American Express (NYSE: AXP), Synchrony Financial (NYSE: SYF), and Huntington Bancshares (NASDAQ: HBAN), rocketed higher on Wednesday, up 6.3%, 17.8%, and 11.8%, respectively, as of 11:49 p.m.

The banking sector was broadly lifted after last night's election of Donald Trump and a potential Republican sweep of Congress. The across-the-board rally for financial stocks appears to be due to enthusiasm over the prospect of greater financial deregulation, with perceived "riskier" financial stocks rallying the most.

Massive moves in banking and credit card stocks

The prospect of the incoming Trump Presidency and Republican term in Congress increases the prospects of a rollback in regulations and consumer protections put in place after the global financial crisis of 2008 and enforced aggressively under the current administration.

For instance, last year, the Biden Administration proposed cracking down on excessive "junk" fees, like bounced check and overdraft fees, and directed the Consumer Financial Protection Bureau (CFPB) to make it easier for consumers to "break up with their bank," among other measures meant to shield consumers from certain banking charges. However, the change in administration is likely to either reverse or prevent those regulations from going into effect.

Credit card companies are some of the bigger fee-chargers in the banking industry. While American Express should benefit from the regulatory rollback, Synchrony Bank, which typically issues private-label credit cards for other brands and, thus, caters to more of a lower- and middle-class clientele than American Express, rallied even more. Synchrony's super-low valuation at just 8 times earnings to start the day was also a factor and, probably, at least in part due to this regulatory overhang. Hence, the stock popped very significantly.

Finally, on regulation, Republicans may seek to reduce capital cushion mandates. That would allow banks to use more of their capital for lending and shareholder returns, potentially boosting earnings growth.

Image source: Getty Images.

In addition to banking deregulation, there will likely be relief on the merger and acquisition front. The Biden Administration has been known to be very aggressive in attempting to block mergers. Therefore, there could be more tie-ups in the American regional banking system, as the U.S. banking system is still more fragmented than those in many other countries. Huntington Bancshares is a $25 billion market-cap regional bank and could be either an acquirer or acquiree.

Finally, there is also the thought that a Trump Presidency may lead to higher government deficits and, therefore, higher interest rates and inflation. While the post-pandemic inflationary period was not good for banks, as it was thought to potentially lead to a recession, a higher interest rate environment without a recession could theoretically lead to higher net interest income for banks and credit card companies.

But there is reason for caution, too

While financial industry investors are cheering today's news, investors should keep in mind the dual-sided nature of deregulation and higher interest rates on financial companies. While it's true that too much regulation can stifle growth, innovation, and acquisition activity in the banking sector, too little can also pave the way for malfeasance or reckless behavior on the part of bankers.

Remember, deregulation was part of the reason behind the 2008 Great Financial Crisis, in which highly leveraged banks succumbed to a decline in the housing sector. Therefore, bank stock investors need to keep their eyes wide open for the prospect of reckless management behavior or runaway inflation. Both are risks to spoil the party investors are enjoying today.

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Synchrony Financial is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.