Earnings season kicks off this week, with JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) reporting on Thursday

The financials—including the big banks, insurers, and asset management companies—are expected to be a standout during the first quarter earnings season, with earnings per share growth estimated at 10.5% by the street.

Investors and analysts will be interested, in particular, in hearing anything management has to say about the outlook for regulation under Trump.

The positive drivers

A rebound in capital markets activity

Goldman Sachs’ Richard Ramsden sees capital markets revenues increasing 15% year-over-year, lapping easy comparisons from last year.

The market for initial public offerings has been much stronger year to date, with 25 IPOs—including the high profile Snap Inc (SNAP)—raising nearly $10 billion, as shown in the chart below by Renaissance Capital. This rebound follows last year’s record low offerings, the worst year since 2003.

Merger and acquisition overall activity has also remained robust, following a record-setting 2015 and 2016. Overall deal value grew 9% to $679 billion, according to Mergermarket.

Net interest margin improving

Higher interest rates are good for banks, as pointed out continuously by analysts. More precisely, banks benefit when long-term interest rates are higher than short-term interest rates.

When the difference—or spread—between long-term and short-term rates is wide, this is known as a steep yield curve. A steep yield curve—not a flat yield curve—is good for banks because they borrow short-term through customer deposits and lend long-term through loans like mortgages. This “net income margin” is a key profitability metric in the sector, and it has been under pressure in recent years with near-zero rates.

Higher yields boosted by Fed action—leading to a steepening yield curve—should provide net income relief to banks in the first quarter of 2017.

The negative signs

While improved capital markets activity and interest rates provide an important tailwind for the sector, declining loan volumes have raised some worries, causing outsized pain for some regional banks—from Zion (ZION) to KeyCorp (KEY) and BB&T (BBT)—so far this year.

In fact, analysts see EPS growth of just 4% for the regional banks, compared to over 33% growth for the “big 5” banks—Bank of America (BAC), Citigroup, JPMorgan Chase, Goldman Sachs (GS), and Morgan Stanley (MS).

Loan volumes

Since the election, loan growth has decelerated 350 basis points year-over-year, according to Goldman Sachs, driven by lower commercial and industrial growth along with real estate loans, a fact that has sparked some concerns about overall financial health.

As shown below, both consumer loans and commercial and industrial (C&I) loans are down.

Lower loan volumes have had an outsized impact on regional banks, where lending is their primary business and there is less diversity in business lines, including capital markets activities.

During a town hall with Yahoo Finance last week, JPMorgan Chase CEO Jamie Dimon explained that not all banks are doing well, even though his stock—along with the other bulge bracket banks like Goldman Sachs and Citigroup—has well outperformed the market over the last year.

“The fact is a lot of banks aren’t doing that well,” Dimon told Yahoo Finance. “They look at this thing—the aggregate profits of financial institutions…wrong way to look at it. A lot of community banks are having a tough time.”

Goldman Sachs’ Ramsden said the deceleration stems from changes in the markets since the election, including economic uncertainty around policies (like tax reform which has led to less activity in the commercial space), lower refinance volume given higher rates, and a normal seasonal slowdown from card loan growth. And San Francisco Fed president John Williams said the slowdown isn’t reflective of a weak economy.

The Trump factor

Though returns for the group have been tepid so far in 2017, financial sector stocks surged following the presidential election in November—aided not only by stronger economic growth but also by optimism surrounding a pro-business administration. With aims for regulatory and tax relief, estimates for the sector rose.

While uncertainty has increased surrounding the likelihood of Trump’s agenda being fulfilled, particularly following the failed healthcare reform bill, expectations remain somewhat upbeat for regulatory reform, according to analysts.

Earlier this year, the president signed an executive order instructing regulators to examine financial rules and file a report on their findings.

On Tuesday, President Trump, speaking to CEOs, said he will be doing a “revamp” and potentially eliminate Dodd-Frank—signed by President Obama to overhaul regulations after the 2008 financial crisis.

Meanwhile, the Federal Reserve has set the stage for continued interest rate increases—which benefits bank profitability—with current projections calling for 3 hikes this year, following a 25 basis point increase during the March meeting.

In the end, strength in the broader economy should aid the sector, according to analysts, as the financials are the most levered to overall economic health.

“Although optimism is a late cycle phenomenon, history tells us the best returns often come at the end,” Morgan Stanley’s Michael Wilson wrote in a recent note. “It has taken eight long years to get here, but Wall and Main Street are finally starting to feel a bit better about the future.”

Nicole Sinclair is markets correspondent for Yahoo Finance

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