Though analysts have sometimes been incorrect, many expect Democrats to regain some power in the upcoming midterm elections. Despite this expectation, Wall Street anticipates President Trump will strengthen his less popular policies after the vote.
Polling from Harvard University currently predicts a 96% probability that Democrats will take control of the House of Representatives, and a 78% chance they could secure both the House and the Senate.
Goldman Sachs informed clients that they foresee an increase in tariffs if Democrats gain more influence in Congress. Economists Alec Phillips and Abhay Duggirala explained that, while Democrats aim to reverse certain tariffs imposed by President Trump, the impact might be minimal as these reversals would likely focus on select countries or products, such as Canada.
President Trump is expected to announce additional tariff increases that could offset these reductions, leading to an increase in the U.S. effective tariff rate by close to 2 percentage points. Tariffs are projected to become a crucial revenue source shortly.
“Democrats have indicated they would seek to reverse some of President Trump’s tariffs, but we expect this to have a limited effect since the reversals would likely be focused on a few countries (e.g., Canada) or products,”
“We expect President Trump to announce new tariff increases after the election that would more than offset those reductions, likely resulting in a rise in the US effective tariff rate of a little under 2pp.”
With ongoing conflicts in the Middle East, the national debt sitting at $40 trillion, and calls from budget hawks to decrease deficits to 3% of GDP from the current 6%, the focus on tariffs as a revenue source is significant.
According to ING’s James Smith, attempts to reduce these deficits could face obstacles in a more divided government. Fiscal gridlock might redirect focus to trade policy and extracting more revenue from import relationships.
James Smith stated:
“Remember tariffs? After the Supreme Court struck down Trump’s emergency tariffs, temporary 10% blanket rates ultimately gave way to a more permanent structure under Section 301. The issue has since slipped remarkably far down the agenda.”
Uncertain Strategies in the Middle East
The White House’s post-midterm strategies in the Middle East remain uncertain. UBS’s Paul Donovan has suggested that President Trump might escalate actions in the Gulf war, particularly if his pursuit of popularity decreases.
A Pew Research study shows limited voter support for Trump’s handling of the Iran conflict. Only 14% strongly approve, and 20% somewhat approve. With voter discontent, Trump’s motivations could be centered around national security and personal legacy.
Donovan also questions the Republican response:
“Where markets will want to focus is on the Republican reaction to the results. Does the Republican Party divide over MAGA-related issues, and does President Trump escalate hostilities in the Gulf War with wider economic consequences at home and abroad?”
The long-term costs associated with military actions contribute to debates over government spending. Reports now estimate the cost of the Iran conflict at $47 billion, extending far beyond initial expectations.
Deutsche Bank informed clients of likely Republican moves:
“Republicans will likely attempt to pass a reconciliation bill along party lines in the coming weeks that could add substantially to defense spending and potentially address the debt limit, which will have to be dealt with before the late summer/fall of next year.”
“Recall, also, that federal government funding runs out on December 11 which will require bipartisan support for a continuing resolution to prevent a shutdown.”
Trump’s recent signature of the Continuing Appropriations and Extensions Act on September 2 allows federal agency funding through December 11. This requires bipartisanship to avoid a government shutdown.
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About the Author
Eleanor Pringle is a senior reporter at Fortune. She covers news, the economy, and personal finance. Her background includes work as a business correspondent and news editor in UK regional news. She trained with the Press Association after graduating from the University of East Anglia.
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