Financial stocks may have pared back some of their big gains in recent days, but all signs are pointing to a positive outlook for the sector now that President Donald Trump is in office, former Wells Fargo CEO Dick Kovacevich told CNBC on Friday.
Trump was sworn in as the 45th president of the United States earlier in the day.
"He wants to significantly reduce unnecessary regulations, where the cost of the regulations is greater than the benefits. He wants to grow the economy at least at 3 percent, if not 4 percent. He wants to significantly reduce taxes," Kovacevich said.
He believes if those things occur, there will be at least three increases in the fed funds rate this year and the Federal Reserve will stop buying long-term securities.
"All of those things are very, very favorable to the earnings of financial institutions and because the P/E ratios of financial institutions are about 30 percent below that of the market, there's lots of room for that to increase," Kovacevich explained.
Financials have been rallying after Trump won the election in November as investors pinned their hopes on deregulation and tax cuts from the new administration. However, the sector was lower this week amid uncertainty about what government policy would actually look like.
"We've had a huge runup, the Trump runup so to speak. So the fact that there would be some sort of retraction makes some sense," Kovacevich said.