Wall Street Salivates Over a New Trump Boom

Wall Street has rarely been more excited by an election.

U.S. stocks’ capitalization rose by $1.62 trillion on Wednesday, their fifth-best one-day showing ever, following Donald Trump ’s decisive election victory . The surge highlights the opportunity that investors, bankers and others in finance are hoping to embrace over four years of tax cuts, deregulation and economic expansion.

“Investors are celebrating,” said Jack Ablin , chief investment officer at Cresset Capital in Chicago. He was among those buying shares of smaller companies, on the bet that Trump’s policies will rev up the economy.

The enthusiasm is especially heated in a few areas, investors and bankers said. Banks and other financial companies climbed, with the KBW Bank Index rising 11%. Investors expect regulatory scrutiny will ease in a Trump administration.

Some also expect more dealmaking, potentially among smaller and midsize banks. The expected departure of Lina Khan, who leads the Federal Trade Commission and has been a thorn in the side of executives hoping to work out tech acquisitions, was cheered by investors and bankers.

“A lot of these mergers have been thwarted by the current administration,” the activist investor Carl Icahn said in an interview late Tuesday. Given a Trump victory, he said, “That’s going to change.”

The rally in shares of smaller companies caught many portfolio managers’ attention, with the Russell 2000 index of small companies rising 5.8%. Investors said a shift from accelerating globalization, which helped multinational companies, toward a focus on aiding domestic manufacturers and other companies will be beneficial.

“There is an expectation of economic policy pivoting inwardly for domestic growth, thus benefiting small-caps through broader growth,” said Michael O’Rourke , chief market strategist at JonesTrading.

There is no guarantee that Wall Street’s dreams will be fulfilled, of course. The expected Trump policies bring twin threats of higher inflation and larger budget deficits, economists have warned, potentially discouraging the Federal Reserve from cutting interest rates as aggressively as some had hoped.

Key members of the incoming administration, including Vice President-elect JD Vance, have advocated for greater scrutiny of mergers. Many are also outspoken in favor of tariffs, government intervention in the economy and a weaker dollar— positions that put them at odds with many in finance.

It also isn’t clear if other goals of a new Trump administration, including increased energy production, can be achieved.

“Less regulation and pro-growth policies may be good for markets longer term, but be a little careful what you wish for,” said Dan Ivascyn , Pimco’s chief investment officer. “Inflation remains above central bank targets, and the Fed has said they will remain diligent in the inflation fight.”

For a day, at least, bulls shoved these concerns aside to focus on what they view as bright profit-making opportunities in most every industry and area on Wall Street, especially banks, energy (fossil fuels, not solar or anything too green) and dealmaking. Here is a look at some of the most popular bets.

Deals boom?

Dealmakers expect mergers and acquisitions to come roaring back, with the installation of business-friendly regulators replacing those backed by Sen. Elizabeth Warren (D., Mass.), a noted dealmaking foe. Goldman Sachs and Morgan Stanley were among the strongest performers on Wednesday; those firms are among the most deal-oriented.

“We’re poised for a potential surge in M&A activity,” Frank Aquila, Sullivan & Cromwell’s senior M&A partner, said Wednesday on LinkedIn.

Shares of firms whose deals have been scrutinized by the Biden administration, including Capital One Financial and its acquisition target, Discover Financial Services , on Wednesday rallied on the expectation that the administration would likely let more deals pass.

The rebound has been a long time coming, from dealmakers’ perspective. M&A volume peaked in 2021 after a pandemic-induced deal frenzy and has been relatively muted since then. Higher interest rates have kept private-equity firms, typically a major purchaser of companies, on the sidelines, and caution has reigned. Even such technology giants as Amazon.com and Facebook ’s owner, Meta Platforms , have been quiet as regulators challenged their dominance.

Now, however, many anticipate a deal frenzy could be at hand. The seven largest U.S. tech stocks on Wednesday added a collective $475 billion in market cap, reflecting in part the expected removal of deal fetters.

More room for banks

Among the biggest beneficiaries of a Trump administration are U.S. banks, a group that has been under regulatory scrutiny that is likely to ease in the next four years.

Bank stocks surged Wednesday in a wager that a strong economy, increased dealmaking and lighter regulation will spur higher profits. Some of the firms that have been under the most pressure from their overseers during the Biden administration surged. Wells Fargo jumped 13 % to a new high. Goldman Sachs and Morgan Stanley both rose more than 10%.

“It’s clear that a new administration will bring policy changes potentially important to our business and clients,” Goldman Sachs Chief Executive David Solomon said in a message to his staff that congratulated Trump.

The Trump administration is likely to soften capital rules proposed for the biggest banks, said bankers and people close to his campaign, while rising interest rates should aid bank profitability throughout the industry. Investors are hopeful that a more positive economic environment will ease pressure on regional banks and other smaller lenders, which have suffered in part in the midst of the worst commercial real-estate bust in years.

On Wednesday, the regional lenders KeyCorp , Huntington Bancshares , M&T Bank , Regions Financial and Truist Financial rose 11% or more.

Smaller stocks

Nowhere was the economic optimism more apparent than in small-cap stocks.

The Russell 2000 index marked its best day in nearly two years. Small-caps tend to be more volatile and have trailed large-cap peers this year, partially explaining why they were primed for a big rally.

Investors are hoping that a looser regulatory regime could allow small companies to thrive, while tariffs might help stymie foreign competitors. Shares of Xometry , a software platform that helps product designers and engineers access a network of global manufacturers on demand, has soared around 40% since Monday on expectations that new tariffs could increase demand for its platform.

Small-caps gained momentum in the third quarter thanks to economic strength and rising capital spending from their customers, said Raheel Siddiqui, senior investment strategist at Neuberger Berman.

“The trend was already in place, but Trump’s policies could supercharge it,” Siddiqui said.

Few investors expected a Republican sweep of the presidency and both houses of Congress, which now looks likely. This raises its own set of uncertainties about what new policies will look like, said David Kelly, chief global strategist at J.P. Morgan Asset Management.

“Relative to the last Trump term, it’s looking like he doesn’t have to worry about some congressional check on his actions, and of course he’s not running for re-election,” Kelly said. “That gives him a great deal of scope to pick and choose which policies he wants.”

Write to Gregory Zuckerman at Gregory.Zuckerman@wsj.com , Lauren Thomas at lauren.thomas@wsj.com , AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Jack Pitcher at jack.pitcher@wsj.com