Why Trump's wish to cap credit card interest rates to 10% won't work

Key Concepts

• KBW Banking Index: A benchmark index tracking the performance of US banking stocks.
• Executive Order vs. Legislation: The difference between a presidential directive (executive order) and a law passed by Congress.
• Credit Losses: The amount of money a lender loses when borrowers default on their loans.
• ECM (Equity Capital Markets): Division of investment banking focused on raising capital for companies through the issuance of stocks.
• IPO (Initial Public Offering): The process of offering shares of a private company to the public for the first time.
• Yield Curve: A graph plotting the yields of similar-quality bonds across different maturities. A positive slope indicates longer-term bonds have higher yields than shorter-term bonds.
• H8 Data: Weekly statistical release from the Federal Reserve detailing changes in bank credit and security holdings.
• Second Derivative: In this context, refers to the rate of change of growth – how much faster or slower growth is becoming.
• Basis Points: A unit of measurement used in finance to describe the percentage change in an interest rate or yield (1 basis point = 0.01%).

Bank Earnings Preview & Potential Headwinds

The segment focuses on the upcoming bank earnings reports, with JP Morgan Chase initiating the season on Tuesday. Analysts anticipate record revenues, and one analyst predicts the KBW Banking Index will outperform the S&P 500 for the third consecutive year. However, a potential disruption comes from President Trump’s call for a 10% cap on credit card interest rates.

The 10% Interest Rate Cap Proposal

President Trump’s proposal to cap credit card interest rates at 10% is currently being assessed. Gerard Cassidy of RBC Capital Markets explains that this would likely require either legislation from Congress or formal regulation from financial regulators, similar to the Credit Card Act of 2009. He believes the proposal is primarily a political strategy aimed at addressing cost of living concerns, particularly in light of recent election results (specifically the New York City mayoral election).

Cassidy argues that a forced reduction to 10% would negatively impact borrowers. Banks, facing potential losses (some with credit losses already at 5-7%), would likely reduce credit availability, particularly to higher-risk borrowers who rely on revolving credit. This would ultimately shrink consumer spending and potentially harm the economy. He notes that the market has already reacted to the news, with initial stock declines, but anticipates the proposal will likely stall and serve as “political fodder” for the coming months.

Quote: “If the banks were actually forced to lower their credit card rates to 10%, certain borrowers would not qualify for credit cards and would affect the economy and affected of course negatively.” – Gerard Cassidy

Capital Markets Outlook for 2026

Shifting focus to earnings expectations, the discussion highlights the strength of capital markets revenue. Cassidy anticipates continued growth in 2026, assuming the US economy grows at 2-2.5%. The Atlanta Federal Reserve’s real GDP forecast currently suggests a potential 5% growth rate for the current period, though this is considered unlikely.

He points to a supportive regulatory environment and deregulation fostering M&A activity. Investment banking pipelines remain full, despite a less robust IPO market in 2025, with potential for larger IPOs in the current year. Debt capital markets experienced a record year in 2025 and have started 2026 strongly. Trading revenue, while more volatile, is expected to benefit from current market volatility.

However, Cassidy cautions about the “second derivative” – the rate of change in growth. He anticipates it will be increasingly difficult for capital market players to maintain the same level of year-over-year earnings growth in the second half of 2026 compared to the second half of 2025 due to tougher comparisons.

KBW Bank Index Outperformance & Loan Growth

Despite the challenges in maintaining high growth rates, Cassidy remains optimistic about the KBW Bank Index outperforming the S&P 500 for a third consecutive year. This optimism is driven not primarily by capital markets, but by strong loan growth.

Federal Reserve H8 data shows loan growth accelerating from 1% year-over-year at the beginning of 2025 to 5-6% currently. Furthermore, the yield curve is currently favorable for lenders, with the Fed funds rate above 3% and the 10-year Treasury yield remaining above 4% – a situation not seen in 20 years. This positive slope (75-100 basis points) is highly beneficial for lending profitability.

Quote: “We are in the camp that is looking for this year once again that the banks will outperform the S&P 500 like they did in 24 and 25.” – Gerard Cassidy

Investment Recommendations & Potential Risks

Cassidy recommends Fifth Third and Mnt Bank as strong investment picks, citing their positive outlooks and recent shareholder approvals (Fifth Third’s acquisition of Commerica). He acknowledges that stocks of investment banks like Goldman Sachs and Morgan Stanley might experience a “buy the rumor, sell the news” scenario, potentially trading off despite strong expectations. However, he maintains a positive outlook for JP Morgan, City, and BFA as well.

Synthesis/Conclusion

The upcoming bank earnings reports are expected to be strong, driven by robust capital markets activity and, crucially, accelerating loan growth. While President Trump’s proposed interest rate cap presents a potential headwind, analysts believe it is unlikely to be implemented. The key to continued bank outperformance lies in the favorable lending environment created by a growing economy and a positively sloped yield curve. Investors should be aware of the potential for slower growth in the second half of 2026 due to tougher year-over-year comparisons, but overall, the outlook for the banking sector remains positive.