Trump's Tariff Policy and the Financial Sector: Navigating Risks and Opportunities for Large-Cap Banks

The financial sector, particularly large-cap banks such as Goldman Sachs (GS), faces a complex landscape shaped by President Trump's aggressive tariff policies and regulatory shifts. As the U.S. economy grapples with the dual forces of protectionism and deregulation, investors must weigh the risks and opportunities for financial institutions. This article dissects the interplay between Trump's trade agenda and the regulatory environment, offering insights into how these dynamics could reshape bank valuations and risk profiles.

Economic Impacts of Tariffs: A Double-Edged Sword

Trump's tariffs, now spanning over 70% of U.S. imports, have introduced significant economic headwinds. According to recent analyses, these policies are projected to reduce U.S. GDP by 0.8% in 2025, with households facing an average $1,270 in additional costs due to higher prices on imported goods. While tariffs generate substantial federal revenue (estimated at $167.7 billion in 2025), they also dampen consumer demand and complicate global supply chains.

For large-cap banks, the implications are twofold. On one hand, a weaker economy could reduce loan demand and increase credit risk, particularly in sectors like manufacturing and retail. On the other hand, higher government revenues may stabilize public finances, indirectly supporting credit quality in government-backed sectors. The key question is whether the drag on economic growth will outweigh the benefits of reduced fiscal deficits.

Regulatory Relief: A Tailwind for Bank Valuations

While tariffs create economic uncertainty, Trump's deregulatory agenda offers a counterbalance for the financial sector. Goldman Sachs, which has long criticized the “regulatory overhang” imposed by post-crisis rules, stands to benefit from anticipated changes to Basel III capital requirements and stress testing frameworks.

1. Basel III Recalibration: The administration is expected to delay or soften the Basel III Endgame rules, which would have required global systemically important banks (GSIBs) to hold more capital. This could free up $650–$750 billion in excess capital for U.S. banks over four years, improving return on equity (ROE) and profitability.
2. CCAR Stress Testing: Reforms to the Comprehensive Capital Analysis and Review (CCAR) process—such as less severe stress scenarios and reduced linkage to capital requirements—may lower capital buffers, enabling banks to allocate resources more efficiently.
3. Mergers and Acquisitions: Easing anti-consolidation rules could spur mergers, allowing larger banks to achieve cost synergies and scale advantages. Goldman Sachs, with its strong balance sheet, is well-positioned to capitalize on such opportunities.

Opportunities in a Deregulated Environment

The anticipated regulatory shifts present a unique opportunity for large-cap banks to enhance valuations. By reducing compliance costs and capital constraints, deregulation could improve ROE, which has languished at 11% (compared to 18% in 2006). Goldman Sachs' recent emphasis on “capital efficiency” aligns with this trend, as the firm has already begun restructuring its balance sheet to prioritize high-margin activities.

Investors should also consider the broader sector dynamics. The S&P 500 Financials Index has historically outperformed during periods of regulatory easing, as seen in 2017 under Trump's first term. A repeat of this trend could see banks like Goldman Sachs outperforming the broader market if deregulation proceeds as expected.

Risks in the Trump Trade Agenda

Despite these opportunities, risks persist. Tariff-driven economic slowdowns could reduce credit demand, particularly in small business and consumer lending. Additionally, retaliatory tariffs from China, the EU, and others threaten to disrupt trade-dependent sectors, indirectly impacting banks' exposure to corporate credit risk.

Moreover, the legal uncertainty surrounding key tariffs (e.g., the IEEPA tariffs currently under appeal) introduces volatility. A sudden reversal or escalation in trade tensions could trigger market corrections, affecting bank asset quality and investor sentiment.

Investment Implications and Strategic Recommendations

For investors, the key is to balance the tailwinds of deregulation against the headwinds of trade policy. Here are three strategic considerations:
1. Position for Deregulation: Overweight large-cap banks with strong capital positions and exposure to capital-light businesses (e.g., investment banking and asset management). Goldman Sachs' recent focus on these areas makes it a compelling candidate.
2. Hedge Against Trade Risks: Diversify portfolios with defensive financials (e.g., insurance companies) less sensitive to trade policy shifts.
3. Monitor Macroeconomic Indicators: Keep a close eye on GDP growth, consumer sentiment, and sector-specific credit trends. A sharp economic contraction could negate regulatory benefits.

Conclusion

Trump's tariff policies and regulatory agenda are reshaping the financial sector's risk-reward profile. While the economic drag from tariffs poses challenges, deregulation offers a path to higher profitability for large-cap banks. For Goldman Sachs and its peers, the coming months will test their ability to navigate this duality. Investors who adopt a measured, data-driven approach—leveraging both regulatory tailwinds and macroeconomic hedges—may find fertile ground in the financial sector.