Regulatory Rollback: Four Sectors to Watch

May 20, 2025

Discover how governmental deregulation efforts could spur economic and market gains in select industries.

Author
Monica Guerra, Head of Policy, Morgan Stanley Wealth Management
Author
Daniel Kohen, U.S. Policy Strategist, Morgan Stanley Wealth Management

Key Takeaways

  • The financial sector could benefit from looser lending oversight and favorable conditions for M&A activity and crypto, but consumer risks may increase.
  • Cybersecurity, AI and software companies could benefit from a “develop first, regulate later” approach, but selective pressures could weigh on social media firms.
  • U.S. natural gas and nuclear power companies could benefit from favorable policies amid robust demand from Europe and global tech companies.
  • Biotech firms may gain from easier access to capital and potential for increased mergers, but pharma and managed-care companies could see mixed results.

President Trump’s second term has kicked off with a flurry of restrictive trade actions and fiscal austerity measures that have rattled financial markets and at times driven extreme volatility. However, there may be a silver lining for investors: These actions are likely to be followed, eventually, by pro-growth deregulation policies that could spur economic growth and market gains.

 

How? For businesses, a lower regulatory burden can decrease wage expenses related to regulation. This allows company management to redirect revenues toward growth initiatives, potentially spurring innovation and reducing costs. For financial markets, the anticipation of less regulation often boosts investment performance, especially for stocks in highly regulated industries.

 

In particular, Morgan Stanley’s Global Investment Office believes investors should watch for deregulation-related risks and opportunities in four key sectors: 

  1. 1
    Financials: A breather for banks and crypto markets

    Potentially looser lending oversight and lower interest rates could stimulate community banking activity in the second half of 2025, potentially driving higher growth in bank loans, particularly for small businesses. Meanwhile, less-stringent merger-and-acquisition (M&A) rules could lead to more bank tie-ups that can boost valuations. In addition, lower capital requirements under international standards known as “Basel III Endgame” could benefit large-capitalization banks

     

    Reduced federal scrutiny may also be good news for cryptocurrencies, which rallied post-election. More favorable regulation and positive lawmaker sentiment could help spur wider adoption among retail investors, currently at roughly 28% of individuals, while raising crypto’s popularity with institutional investors.

     

    That said, governmental efforts to weaken the U.S. Consumer Financial Protection Bureau, which mitigates predatory lending practices, could create greater consumer lending and credit risks.

  2. 2
    AI and tech: ‘Develop first, regulate later’

    In technology, the administration’s “develop first, regulate later” stance, particularly with regard to artificial intelligence (AI), could continue to spur innovation and growth. Generational investments in AI and the reshoring of semiconductors signal that AI is a national security priority for Republicans and Democrats alike, with any regulation likely to come only from states. Companies focused on cybersecurity and software, having outperformed semiconductor and hardware tech firms this year, may continue to benefit from widening AI adoption and increased trade barriers.

     

    Social media and information-related companies, however, could face selective regulatory pressure if they are at ideological odds with the administration, potentially adding volatility for specific companies.

  3. 3
    Energy: Opportunities in natural gas and nuclear power

    Despite the president’s efforts to boost domestic production through looser permitting and other incentives for energy companies, oil output is already at record levels and production is unlikely to rise further without a significant shift in global market dynamics. By contrast, the deregulation of natural gas, such as lifting a Biden-era pause on new U.S. natural gas export permits, may be met with increased foreign demand, especially from Europe, likely benefiting stocks in the industry.

     

    Additionally, while the White House’s policies favor fossil fuel production, clean energy stocks may nonetheless get a boost from lower borrowing costs if rates fall this year. The administration also has embraced Biden-era policy supporting nuclear energy, which is likely to benefit from a reduced regulatory burden, as large tech companies turn to nuclear as a complementary energy source to meet growing demand from AI and data centers.

  4. 4
    Health Care: A potential boon for biotechs?

    Deregulation could have mixed effects for health care. Changes to vaccine mandates, for example, could hit pharmaceutical companies, although the impact could be muted for those with diversified drug portfolios. Potential Medicaid downsizing could have negative public health effects and pressure lower-end consumers as their out-of-pocket costs rise, creating risks for managed-care companies and consumer discretionary stocks.

     

    On the other hand, biotech firms stand to gain from potential deregulation, as well as any potential interest rate cuts, that support greater access to capital, R&D and market performance. Although M&A activity has been modest in 2025, less regulatory scrutiny and lower rates may support a pickup in activity later this year, potentially fostering firm consolidations that fuel higher valuations.

Looking ahead

While deregulation is poised to create opportunities across these sectors, the timing and extent of potential benefits may vary. Investors should remain vigilant, considering both the immediate potential advantages and the long-term implications of reduced regulatory oversight. As the landscape evolves, staying informed and adaptable will be key to navigating markets.

 

Your Morgan Stanley Financial Advisor can help you stay up-to-speed on policy developments and their portfolio implications. To learn more, ask your Morgan Stanley Financial Advisor for a copy of the report US Policy Pulse: Deregulation Risks and Opportunities from Morgan Stanley’s Global Investment Office. Listen to the audiocast based on this report.

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