Wall Street’s Trump euphoria ignores hard lessons from the past

Wall Street’s had a wild week. Donald Trump’s huge victory in the presidential race has investment bankers and private equity moguls more excited than they’ve been in a long while.

Now they’re betting on major deregulation, expecting Trump to tear down the regulatory walls built under Biden and open doors for new deals, risky financing, and expanded credit lines. The election outcome feels like a green light for the Street to push boundaries, and they’re ready to take full advantage.

The impact is already obvious. Biden’s plans for stricter capital rules and regulations around climate disclosure and outsourcing are likely out the window. Some executives even talk about Gary Gensler, chair of the SEC, and Michael Barr at the Fed like they’re already gone.

Private equity and asset management firms are eagerly waiting for a Trump-friendly SEC that would fast-track new financial products. These firms want crypto, private credit, and private equity options added to individual portfolios as fast as possible.

Bankers too hope the Fed’s strict annual stress tests on risk levels will be watered down under Trump, freeing banks to take on more aggressive ventures. Investors are even betting on mergers, like a possible one between Capital One and Discover, to slide through with ease.

Deregulation dreams and Wall Street’s confidence boost

Wall Street bigwigs believe stripping back regulatory “bloat” will jumpstart growth. They argue that regulation stacks up over time, and some cuts are overdue. “Banks are back,” said one insider. “Trump wants to ‘build, baby, build,’ and that needs financing.”

But there’s a catch. While some see opportunity, others see a disaster. Trump’s anti-regulation stance, backed by his new “efficiency czar” Elon Musk, could drive skilled regulators to quit. Wall Street wants fast approvals, but a mass regulatory exit might leave agencies unable to handle issues.

A veteran executive had doubts, reportedly saying, “A lot of the enthusiasm is based on a false premise. We’re setting up for the next bubble. It’s definitely coming.”

Experienced Wall Street players know the danger of pushing too far. “Take off too much regulation, and more banks fail,” warned one long-time banker. He pointed to 2018 when Trump loosened rules for midsized banks. That light-touch approach ended up sparking the 2023 regional banking crisis. The fallout justified Barr’s “Basel III endgame” proposal, which would have raised capital requirements—a proposal the industry spent a year fighting off.

State-level regulation risks and lessons from the past

Wall Street’s dreams of a “toothless” federal watchdog come with hidden risks. If the feds go easy, states might step in, filling the gap with their own regulations. It’s happened before. In 2001, George W. Bush’s SEC chair, Harvey Pitt, wanted to create a “kinder, gentler” SEC.

At the time, investment banks were attracting IPO clients with promises of favorable analyst coverage, even for companies unlikely to turn a profit. Pitt tried to address the issue quietly, meeting with big banks and urging them to fix conflicts of interest.

But before reforms were in place, New York Attorney General, Eliot Spitzer, launched a public investigation. He exposed emails that humiliated the industry and outraged investors hit by the dot-com bust. Ten banks had to pay a record $1.4 billion in fines and implement costly reforms.

This victory inspired Spitzer and other state AGs to pursue more cases, and state-level action remains a threat to Wall Street to this day.

Some pros may view Spitzer’s actions as ancient history, but they should remember this industry’s cyclic nature. Customers aren’t forgiving if they feel scammed. Solid regulatory frameworks can protect firms as much as they restrict them. Remember the collapse of Silicon Valley Bank? Remember how bad it was?

Stocks, crypto, and an all-out buying spree

Throughout the year, analysts have questioned the sustainability of the rally, which has added trillions to stock valuations, sent Bitcoin to new highs, and fueled a credit surge. 

Yet every doubter has been proven wrong. With Trump back, markets are riding a fresh wave of optimism, and investors fear they’re not bullish enough.

The numbers are staggering. Over five sessions, the stock market gained over $2 trillion, with $20 billion pouring into funds on Wednesday alone. Small-cap stocks jumped nearly 9%, bank shares rallied, and Bitcoin hit a new all-time high above $80,000.

VanEck’s Matthew Sigel declared the bull case “stronger than ever,” projecting $180,000 for Bitcoin next year and a wild $3 million by 2050.

Only bonds have been a skeptical holdout, worried about the price tag for Trump’s anticipated fiscal stimulus. But even Treasury yields steadied by the end of the week. Wall Street is now busy predicting how high this boom will go.

Sky-high valuations and the Fed’s rate strategy

The frenzy has flooded every corner of Wall Street. The S&P 500 hit its 50th record of the year, closing the week up 4.7%. The VIX Index, Wall Street’s “fear gauge,” saw its largest weekly drop since 2021. But rapid gains like these can blind investors to cracks in the economy.

In September, labor market concerns briefly knocked the S&P down 4% in a single week. In August, economic jitters and hedge-fund adjustments triggered a near 10% correction, and the VIX experienced its biggest spike in 30 years.

Current valuations are sky-high after a two-year rally. Trump once called rising stock prices a report card for his presidency, but the stakes are much higher now. 

Election-day earnings multiples were at record levels, meaning tax cuts alone may not spark another rally. Higher borrowing costs from ballooning budget deficits could dampen gains from his corporate-friendly policies. 

Then there’s the Fed. Some banks, like Barclays and Toronto-Dominion, are lowering their rate-cut expectations for 2025, concerned that Trump’s immigration policies and tariffs could drive inflation. Even so, the Fed’s recent meeting only fed optimism in the risk markets.

Fed Chair Jerome Powell confirmed the economy’s strength and avoided any mention of skipping future rate cuts after Thursday’s quarter-point reduction.

Despite hints of slower job growth, economic indicators remain solid. Citigroup’s US Economic Surprise Index, a gauge of how economic data is trending versus expectations, still shows positive momentum.