Structural Shifts in Financials: Why Hedge Funds Are Betting on U.S. Banks—and Why Utilities Are Risky

Hedge funds are pivoting toward U.S. banks with renewed vigor, capitalizing on a post-Trump regulatory landscape that has slashed capital requirements and unleashed pent-up growth potential. Meanwhile, utilities and green energy sectors face mounting headwinds from policy uncertainty and infrastructure bottlenecks. This divergence reflects a strategic reshaping of financial markets, with banks poised for sustained gains—and utilities demanding caution.

The Regulatory Tailwind for Banks

The Trump-era deregulation of banking has created a "perfect storm" of structural opportunities for financial institutions. Key policies, including the proposed reduction of the enhanced supplementary leverage ratio (eSLR) for large banks from 5% to 3.5%, have freed up capital for risk-taking and investment.

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The Federal Reserve's recalibration of Basel III rules has further eased constraints, allowing banks to deploy excess capital into high-margin businesses like trading and wealth management. First-quarter earnings underscored this shift: JPMorgan reported a 24% surge in net income to $10.5 billion, while Morgan Stanley's investment banking fees rose 18% year-over-year.

Hedge funds have taken notice. According to Goldman Sachs, financial stocks became the second-largest sector purchase in 2024, driven by long positions in trading-focused banks. This reflects not just short-term momentum but a bet on a structural renaissance: lower capital burdens and streamlined regulations are enabling banks to grow revenue without proportional increases in risk.

The Cautionary Tale of Utilities and Green Energy

While banks thrive, utilities and green energy sectors face a murkier outlook. Regulatory whiplash and supply chain disruptions are undermining growth prospects.

1. Policy Volatility and Trade Barriers

The Inflation Reduction Act (IRA), a cornerstone of clean energy incentives, is being eroded by targeted cuts to EV tax credits and lingering tariffs on solar panels. Meanwhile, the Supreme Court's narrowing of federal regulatory authority has cast doubt on environmental rules, creating a compliance limbo for utilities.

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2. Infrastructure Gaps and Demand Surges

Despite rising electricity demand—driven by AI/data centers and crypto mining—permitting delays and interconnection backlogs threaten grid reliability. A recent analysis by the North American Electric Reliability Corporation (NERC) warned that reserve margins in key regions could dip below safe thresholds by 2026.

3. Market Dynamics Favoring Fossil Fuels

Utilities' push to decarbonize faces headwinds. While renewables remain cost-competitive, natural gas retains an edge in reliability. The lifting of LNG export bans has boosted U.S. gas prices, making it harder for renewables to undercut fossil fuels in certain markets.

The Investment Thesis: Banks Win, Utilities Lose—But Proceed With Caution

Banks: Overweight allocations to financials are justified, particularly in trading-focused institutions like Goldman Sachs (GS) and Morgan Stanley (MS). Their ability to leverage reduced capital requirements for fee-generating activities positions them to outperform.

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Utilities: Underweight unless investors can identify specific catalysts, such as rate hikes or regulatory clarity. Sectors like solar (FSLR) and wind face persistent trade barriers and cost inflation.

Risks to the Outlook

• Monetary Policy: While banks benefit from deregulation, rising interest rates could compress net interest margins.
• M&A Overheating: A surge in bank mergers (e.g., the $4 billion merger of Truist and BB&T in 2024) could strain integration efforts.
• Regulatory Reversals: A future administration's potential reversion to stricter rules remains a tail risk.

Conclusion: A Structural Call for Financials, Caution for Renewables

The post-Trump era has fundamentally altered the financial sector's risk-reward calculus. Banks, unshackled by lighter regulations, are now positioned to grow profitably—a dynamic hedge funds are exploiting aggressively. Meanwhile, utilities and green energy sectors face a gauntlet of regulatory, infrastructural, and geopolitical challenges.

Investors should overweight financials selectively, focusing on institutions with strong trading franchises and capital management discipline. Utilities, though critical to the energy transition, warrant caution until policy clarity and supply chain stability emerge. As one trader put it, “Banks are the new growth story—utilities are the old problem.”

Data as of June 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.