Under former President Joe Biden, regulators took a stringent approach to mergers and acquisitions (M&A), focusing on limiting the size and scope of major deals. As we entered this year, investment banks were hopeful that a change in administration under President Donald Trump would foster a more favorable environment for M&A activities.

However, recent developments show this optimism could be misplaced. Investment banks, including industry leaders like Goldman Sachs (GS -1.41%), now face the reality that the Trump administration will uphold a rigorous stance on larger transactions, maintaining guidelines established in 2023.

Here's what that means for major deals and how investment banks could be affected.

The Department of Justice will continue to scrutinize deals that reduce competition

In late January, the Department of Justice (DOJ) under Trump sued to block Hewlett Packard Enterprise from acquiring Juniper Networks in a $14 billion deal. The DOJ alleged that the acquisition, which would combine the second- and third-largest providers of enterprise wireless networking, would substantially lessen competition in that market.

The move marked the first indication of how the Trump administration would handle M&A transactions. It signaled that it would continue scrutinizing major deals under guidelines adopted by the Biden administration in 2023.

Under former Commissioner of the Federal Trade Commission (FTC) Lina Khan, the FTC and DOJ issued strict guidelines that focused on the importance of competition to promote lower prices and quality. Their primary focus was on major deals that could reduce competition in the marketplace and leave consumers with fewer options to choose from.

These guidelines crack down on major deals and make it harder for companies to make big deals that may violate antitrust laws. Over the past several years, some major deals, including JetBlue and Spirit Airlines, Kroger and Albertsons, and Capri and Tapestry, have been called off after facing intense regulatory scrutiny.

Image source: Getty Images.

Banks had been hoping for looser restrictions

The current DOJ will continue to crack down on deals, especially major technology company deals, which have been a focus of Trump's since his first term. Incoming FTC Chairman Andrew Ferguson said, "We are going to enforce these laws vigorously and aggressively."

The past few years have been tough for investment banks. After a record year in 2021, investment banks got pummeled in 2022 and 2023 as deal volumes plummeted. This happened due to the Federal Reserve raising its benchmark interest rate in response to inflationary pressures. This raising of interest rates left many on the sidelines, waiting for more stability in the market and certainty regarding interest rates, and dealmaking activity plummeted.

Large investment banks, such as Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Citigroup, hoped the Trump administration would be more lenient toward significant deals. Investment banks have been hopeful for loosening these strict regulations, which could have resulted in a flurry of deals. This could have given them more advisory revenue and helped spur a boom in deal demand, boosting earnings.

Should investors sell on the news?

While the Trump administration may scrutinize large tech deals, it's not necessarily all bad news for dealmaking activity. Other industries could see the return of large deals. For example, the Federal Deposit Insurance Corporation has rescinded a policy on bank mergers put in place in 2024, which could encourage more large bank mergers.

MS Price to Tangible Book Value data by YCharts

That said, Goldman Sachs has experienced an 88% increase since November 2023. Meanwhile, Morgan Stanley and JPMorgan Chase trade at elevated price to tangible book values (P/TBV) compared to the past decade and a half. With such a significant run-up and a perhaps less favorable than expected environment for dealmaking, investors may want to consider taking some profits off the table on the news.