For financial stocks, KBW compared the looking fiscal cliff to "the summer of 2011 when Congress nearly allowed the U.S. to default and S&P downgraded U.S. debt. Overall financials underperformed the market during that time period, with the underperformance led by capital market firms, large-cap banks, and life insurance. Conversely, diversified financials, P&C insurance and real estate firms outperformed the market." Cannon expects "similar performance of financials during the December debate over the fiscal cliff," but sees "key differences" this time around, "as the impact of significantly increasing taxes on dividends, payrolls, and high-income families will be factored into stocks during this debate." After such a beautiful run for financial stocks this year, we could be headed into some pretty rough waters heading into the end of the year, with downward price pressure for the simple reason that money managers being paid based on calendar-year results will want to lock in their gains. Under the fiscal cliff scenario, the financial stocks that KBW expects to underperform what would probably be a lousy overall market include Goldman Sachs ( GS), Morgan Stanley ( MS), State Street ( STT), Bank of New York Mellon ( BK), and "most Regional Banks," along with certain asset managers, life insurance companies, and credit card lenders Capital One ( COF) and American Express ( AXP) which have both seen solid returns this year. Financial sectors that KBW would expect to outperform under the fiscal cliff scenario include "Health Care REITs, Triple Net REITs, and Self-Storage REITs," payment processors Visa ( V) and Mastercard ( MA), private label card lender, processor and rewards program marketer Alliance Data Systems ( ADS), and among regional banks, U.S. Bancorp ( USB), and M&T Bank ( MTB). KBW analyst Sanjay Sakhrani said that under the fiscal cliff scenario, "we believe that American Express is likely more exposed to an adverse fiscal cliff scenario, as higher-net-worth individuals could see an increase in their tax rates, which could result in lower discretionary spending," and that "if there were a meaningful deterioration in the unemployment situation, we would expect Capital One to underperform given its higher exposure to subprime borrowers." If unemployment were to rise "significantly," Sakhrani said "we would prefer to own MasterCard/Visa due to their international exposure and lack of significant credit risk and capital management. Of the card issuers," and that he would favor Discover Financial Services "due to its relatively strong core cardholder base (and lower exposure to subprime) as well as its positioning for multiple avenues of asset growth," and ADS, " due to its ability to gain share in the private label card space, potential for more companies to utilize Epsilon to increase their market efficiency particularly with the convergence of commerce, payments, & marketing, and exposure to Canada and Brazil in its loyalty segment."