Shares of “too big to fail” big banks JPMorgan Chase (JPM 0.77%), Bank of America (BAC 0.02%), and Wells Fargo (WFC 0.91%) all rallied big in November, with their stocks increasing 12.5%, 13.6%, and 17.3%, respectively, according to data from S&P Global Market Intelligence.

All three stocks had reported earnings in October, but the election of Donald Trump and Republican majorities to both the House and Senate on Nov. 5 lit a fire under basically all financial stocks, with the biggest, highest-regulated banks seeing some of the very biggest gains.

Hopes for regulatory relief

In the wake of the 2008 financial crisis, U.S. and European regulators implemented a slew of new regulations for banks, especially large “too big to fail” banks. Those regulations required large banks to hold much more equity capital in case of a severe downturn in the economy.

However, the rules also meant banks were prevented from lending as much as they could, and by a significant amount. JPMorgan CEO Jamie Dimon has long thought post-2008 regulations had gone too far, limiting large banks from lending roughly 100% on their deposits to lending just about 65% on their deposits.

But it’s not just lending where regulatory relief might benefit large banks. Current Federal Trade Commission chair Lina Kahn has also been fairly hostile to mergers and acquisitions, fighting almost every proposed tie-up made by any decently sized company. If the resistance to deal-making is relieved and Kahn is removed, more M&A activity could occur.

All three of these banks also have large investment banking segments, so those segments would see a benefit on any M&A relief from a new FTC director. It’s highly likely any new replacement for Kahn would lessen the agency’s opposition to M&A deals.

Finally, a Trump administration and Republican majorities in Congress are likely to at least preserve the lowered corporate tax levels implemented in the 2017 Tax Cuts and Jobs Act, which were set to expire next year. U.S. banks are typically full corporate taxpayers, so the prospect of continued low taxes also allowed investors to pencil in more bottom-line earnings next year and beyond with more certainty.

Financials on fire

The financial sector has actually been the best-performing sector in the global markets this year, even outpacing the technology sector amid all the AI hype.

That can be traced back to much lower starting valuations, the prospect of lower interest rates after a couple years of high inflation, and now this assumed regulatory relief from the incoming administration.

Even after their stock surges this year, JPMorgan, Bank of America, and Wells Fargo all trade with mere mid-teens trailing P/E ratios. Those multiples are higher valuations than these stocks traded at before, but are by no means very expensive.

Therefore, shareholders can feel safe holding these names, while those without exposure to the banking sector might wish to add these big banks to diversify their portfolios.