Trade Truce Sparks a Financial Sector Rebound: Time to Overweight Banks

The U.S.-China trade war has long been a thorn in the side of global markets, but the May 2025 tariff reduction agreement marks a pivotal shift. For investors, this truce—coupled with regulatory easing in the financial sector—creates a golden opportunity to pivot into bank equities. With trade-sensitive financial ETFs like the Financial Select Sector SPDR Fund (XLF) and KBW Bank Index ETF (KBE) surging post-agreement, the case for overweighting financials is clearer than ever.

The Trade Truce: A Tailwind for Banks’ Bottom Lines

The 90-day tariff reduction agreement slashes U.S. tariffs on Chinese goods from 145% to 30%, while China cuts its retaliatory tariffs to 10%. This pause in the trade war removes a key drag on global trade volumes, which directly benefits financial institutions exposed to cross-border commerce. Banks like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), which derive significant revenue from trade financing and international operations, stand to gain as businesses resume cross-border lending and investment.

Moreover, the agreement’s stabilization of trade policy reduces the likelihood of sudden shocks to consumer and business sentiment. This aligns with JPMorgan’s recent downgrade of its U.S. recession probability to just 20% from 40%, signaling a brighter macroeconomic outlook. A less recessionary environment means lower loan defaults, lighter provision expenses, and healthier net interest margins for banks.

Regulatory Easing: A Boost to Banks’ Flexibility

While tariffs dominate headlines, the Consumer Financial Protection Bureau’s (CFPB) Q2 2025 regulatory retreat is equally transformative. By rescinding 67 guidance documents—particularly those targeting Buy Now, Pay Later (BNPL) providers and digital lending—the CFPB has freed banks to innovate without overbearing compliance costs. This regulatory relief directly improves banks’ ability to:
- Expand into high-growth areas like BNPL, where demand is soaring.
- Reduce operational expenses tied to redundant oversight.
- Offer more competitive products to consumers and small businesses.

The CFPB’s shift also signals a broader federal retreat from aggressive consumer protection enforcement, reducing litigation risks for banks. With enforcement resources now focused narrowly on servicemembers and veterans, financial institutions can redirect capital toward growth initiatives rather than legal battles.

ETFs Lead the Charge: XLF and KBE Signal a Sector Turnaround

The market’s enthusiasm is already pricing in this positive news. Consider the performance of two key financial ETFs:

• XLF (Financial Select Sector SPDR Fund): Up 8% since the tariff agreement, outperforming the S&P 500.
• KBE (KBW Bank Index ETF): Gained 12% in the same period, reflecting renewed optimism in regional banks.

These gains are no accident. Financials remain undervalued relative to their growth potential:
- The sector’s price-to-book ratio sits at 1.2x—well below its 5-year average of 1.6x.
- Bank net interest margins are near 2023 highs, driven by resilient short-term rates.

Near-Term Catalysts to Watch

Investors shouldn’t wait for perfection. Three catalysts will solidify this trend in coming months:
1. Tariff Stability: The 90-day truce could extend if negotiations progress, reducing uncertainty for trade-dependent businesses.
2. Risk-On Sentiment: A global rebound in equities—already seen in shipping stocks like Maersk (up 11.5%) and Hapag-Lloyd (up 13.5%)—will further buoy financials.
3. M&A Activity: Regulatory easing could spark consolidation in the banking sector, with undervalued regional banks becoming acquisition targets.

Conclusion: A Strategic Overweight in Financials

The U.S.-China trade truce and CFPB’s regulatory retreat form a dual catalyst for banks’ profitability and valuation expansion. With ETFs like XLF and KBE leading the charge, now is the time to overweight financials. Target institutions positioned for trade recovery (e.g., JPMorgan’s global reach) and those benefiting from regulatory relief (e.g., Bank of America’s digital lending platform) for maximum upside.

The path forward is clear: act now before multiples normalize—and miss this rare convergence of macro tailwinds and policy shifts.