In the 2024 election voters placed the White House and Senate in Republican control. Nearly a week after election day, the House results are still undecided mostly in California but also in Arizona, Colorado, Iowa, Louisiana, Maine, Ohio, Oregon and Washington. The Federal Reserve Open Market Committee cut the overnight rate -¼ point while leaving Quantitative Tightening unchanged. Markets responded by ripping risk assets higher and selling off Treasuries.

The election outcome and market response seems to indicate expectations for stronger economic growth in the outlook. In quarterly bank calls, many executives indicated a belief that commercial clients were awaiting the election outcome with the implication that different scenarios would lead to greater future loan demand. I think the new expectation will be for greater bank balance sheet growth than is currently estimated in 2025 models. Further out, there is new expectation that the corporate tax rate may not revert higher in 2026.

On the inflation front the FOMC lowered (November 7) the overnight rate -¼ point while continuing the pace of QT balance sheet run-off. Chairman Jay Powell repeatedly described monetary policy as sensitive to balanced risk between price stability and maximum employment. In the policy statement press conference, Powell elaborated the committee’s view on inflation today stating, “non-housing services and goods, which together make up 80 percent of the core PCE index, are back to the levels they were at the last time we had sustained two percent inflation, which happens to be in the early 2000s for a period of five, six, seven years. So they’re back to that level. What’s not is housing services. So let’s talk about housing services. Housing services is higher. What’s going on there is market rents, newly signed leases, are experiencing very low inflation. And what’s happening is older leases that are turning over are taking several years to catch up to where market rent leases are. So that’s just a catch-up problem. It’s not really reflecting current inflationary pressures, it’s reflecting past inflationary pressures. So that’s one thing. The other thing is I’d say look at the labor market, not a source of inflationary pressures. Where is it coming from? It’s not a very tight economy. What is the story about inflation? You see that catchup inflation also in insurance and in several other areas.”

I note that the often cited consumer expectation for long run inflation ticked up in the latest University of Michigan Consumer Sentiment survey (November 8). The report noted, “year-ahead inflation expectations fell slightly from 2.7% last month to 2.6% this month. The current reading is the lowest since December 2020 and sits within the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations inched up from 3.0% last month to 3.1% this month, remaining modestly elevated relative to the range of readings seen in the two years pre-pandemic.”

Finally, bank stocks surged higher post-election bringing major bank indices to levels last reached in 2022 as the government helicoptered money to consumers and businesses. My measure of the mid-cap bank equity risk premium now sits at its lowest level in more than 7 years. Credit and liquidity risks for the industry now seem like afterthoughts.

Mid-Cap Banks

The mid-cap bank group gained 11.05% on average last week. The median group 2025 P/E is now 13.23x which is a 13.06% premium to the recent comparable period average P/E of 11.50x. The earnings yield spread (a modified version of equity risk premium) closed at a 29.12% premium to my assessment of neutral. The valuation estimate equates to a price premium of 14.57%.