There was a time when sticking your pension into a Vanguard S&P 500 tracker for a 0.07% fee felt like a no-brainer.
“Never bet against America," wrote Warren Buffett in 2021.
That strategy paid handsomely under the Biden administration and — investors thought — if anyone was going to have the back of the US equity market, it was sure to be Donald Trump.
But it turns out the new president does not care so much for US stocks — or not for now, at least.
Hopes of industrial deregulation freeing up US companies to conquer more Everests have yet to materialise. In banking, expectations that US banks would get a capital windfall and be able to gulp even more of overseas markets have yet to materialise.
Instead, the administration has focused firmly on imposing trade tariffs. So far, markets hate them. Global stocks were hit hard when Trump announced the details on what he believes will always be remembered as ‘liberation day’. Economists slashed growth forecasts for economies around the world, particularly the US.
The bearish lunge appeared indiscriminate, with few sectors immune, including European banks.
The Euro Stoxx Banks Index fell more than 4% on Thursday, as investors priced in the risk of recession. That would likely raise credit losses and, more directly, require lower interest rates, sapping banks' profits.
Yet there has been no dramatic repricing of European Central Bank policy rate expectations. Short-dated forward yields nudged just 5bp lower on Thursday.
Although they will hit growth, global tariffs are likely to be inflationary. That means many now expect interest rates to stay higher for longer.
Higher rates have been a boon to European banks in recent years, fattening net interest margins and launching them into a golden era of profitability.
Partly as a result, European bank capital is stronger than ever, and asset quality is robust. Add to the mix the return of the ‘whatever it takes’ mantra from European politicians.
Backing European banks would not be a new idea to investors, as the tightening trajectory in bank credit spreads over the past 18 months has shown.
But President Trump’s tariff policy has unleashed a new dimension, which may well benefit European banks. Ironically, they might do better out of Trump's populist economics than the 401(k) plans of the average US Joe — or Donald.