Inside Markets — Outlook

The outlook for small and mid-cap stocks improves in the aftermath of the election given assumed deregulation and the potential for tax reform. Trump’s tariff agenda should also favor smaller, more domestically focused companies vs. large cap companies with heavier international exposure. Markets could soon adjust the relative risk premia on companies based on international exposure. It’s worth repeating that the S&P Midcap 400 Index currently trades at a ~15.5x forward multiple vs. the SPX at ~21.5x.

Regional banks were the best performing sub-sector yesterday based on assumptions around deregulation, tax reform and two others: 1) a pro-business/onshoring agenda should lead to increased lending activity; 2) a more favorable M&A backdrop. There’s a valuation argument here too with the group now trading at ~1.45x forward (’25) Tangible Book Value (TBV) vs. its historical valuation range between 1.8x and 2x TBV. During Trump’s first term, the group traded as high as ~2.4x TBV.