The focus of the market next year, what tricks will Trump use for the midterm elections? Goldman Sachs: Lower tariffs and fiscal stimulus!

Goldman Sachs believes that as the U.S. midterm elections approach, the Trump administration is highly likely to implement tariff reductions and fiscal stimulus measures to boost voter sentiment before the elections.

According to news from the trading desk, on December 16, Goldman Sachs Chief Political Economist Alec Phillips published a research report, forecasting that by the end of 2026, the effective tariff rate in the U.S. will decrease by about 2 percentage points from the current level, but will still be 9.5 percentage points higher than at the beginning of 2025.

Additionally, Phillips pointed out that although the second round of fiscal stimulus legislation faces numerous obstacles, relevant measures related to housing policy may be introduced.

The report emphasizes that the cost of living remains the top concern for voters, with 29% of voters listing it as their primary focus, up from 25% before the 2024 presidential election.

Prediction markets indicate that the Democratic Party is more likely to regain control of the House of Representatives next year, which may prompt the Republican administration to take action before the elections.

Increased Probability of Tariff Reductions

Goldman Sachs believes that the Supreme Court is highly likely to rule in January 2026 or shortly thereafter that the tariffs imposed by the Trump administration under the IEEPA exceeded its statutory authority.

Based on the questioning during the oral arguments in November, most judges do not seem to believe that the law authorizes the imposition of tariffs, and if authorized, it may constitute an unconstitutional delegation of congressional power.

Tariffs based on the IEEPA account for about 7.5 percentage points of the 11.4 percentage point increase in this year's effective tariff rate. If the Supreme Court rules that all IEEPA tariffs are illegal, the Trump administration will need to rely on other legal authorities to retain these tariffs.

The most likely approach is to invoke Section 122 of the Trade Act of 1974, which authorizes tariffs of up to 15% for a period of 150 days. During this time, the Office of the U.S. Trade Representative may complete Section 301 investigations of major trading partners.

Some trading partners currently face IEEPA tariff rates higher than 15%, and if the government relies on Section 122 as a transitional measure, tariffs for those countries will decrease.

The report notes that capping tariffs at 15% based on current rates would reduce the effective tariff rate by about 1.6 percentage points. Among these, India currently faces a 50% tariff, accounting for 0.6 percentage points of this reduction.

Additionally, Phillips analyzes that the Trump administration has limited practical ability to conduct Section 301 investigations against all trading partners. While all major economies may become targets, some imported products from smaller trading partners may not be covered.

In recent months, the Trump administration has reached agreements with several trading partners, but many of these are still "frameworks" that have not been formally completed. These agreements have reduced the tariff rates on products covered in specific industries, particularly in the automotive sector. The White House has also released a list of products that will be exempted once formal agreements are completed, which will lead to a slight decrease in the effective tariff rate.

Goldman Sachs estimates that the government has collected about $130 billion in IEEPA tariffs so far this year, and this figure will increase by about $20 billion per month until the court makes a ruling. If the Supreme Court rules that the tariffs are illegal, importers may ultimately receive refunds, but this is unlikely to happen automatically and will require subsequent legal action, which may take months

The Second Round of Fiscal Stimulus Policy Faces High Thresholds

Goldman Sachs believes that aside from tariffs, another means the Trump administration could use to improve economic sentiment before the midterm elections is fiscal policy.

The boost to growth from the first round of fiscal measures is expected to peak in the second quarter of 2026, with politically the most significant aspect being a larger-than-usual tax rebate. Goldman Sachs estimates that the plan will increase tax rebates by nearly $100 billion from February to April.

Previously, Trump proposed a maximum $2,000 tax rebate per person funded by tariff revenues. The complete plan could lead to over $600 billion (2% of GDP) in spending.

However, Phillips believes that even a scaled-down version is unlikely to be realized for three reasons:

• First, the Supreme Court may rule that most tariffs implemented this year are illegal, creating uncertainty about revenue sustainability;
• Second, many Republican lawmakers are concerned about fiscal conditions and prefer to use tariff revenues to reduce the deficit;
• Third, and most importantly, many Republican lawmakers oppose the tariffs themselves and are unlikely to support a family subsidy plan reliant on tariffs.

Nevertheless, the prediction market currently estimates that there is about a 50% chance of issuing at least $1,000 in stimulus checks to Americans before the end of 2026.

Additionally, enhanced Medicare premium subsidies will expire at the end of the year, leading to a reduction in federal tax credits of $20-30 billion in 2026.

The U.S. Senate recently rejected a three-year extension proposal put forward by Democrats, as well as a Republican proposal to provide about $13 billion annually in other forms of Medicare subsidies. Goldman Sachs believes the probability of subsidy extension is slightly above 50%, but this requires bipartisan compromise.

Officials in the Trump administration have suggested using budget reconciliation procedures to increase defense spending again, similar to the $150 billion in defense funding in the July fiscal bill (to be spent over several years).

While Goldman Sachs is currently skeptical about the passage of a second round of fiscal measures before the midterm elections, this could change if there is a consensus on priorities among congressional Republicans.

Housing Policy and Regulatory Reform Are Worth Looking Forward To

Goldman Sachs believes that administrative measures regarding housing seem likely to be introduced.

In September, Treasury Secretary Mnuchin proposed the idea of declaring a housing emergency to address housing costs. While it is currently unclear whether a housing emergency will be declared, the research report indicates that certain administrative measures seem likely to be implemented, potentially focusing on government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Options the government may consider include: loan pricing adjustments, introducing 50-year mortgage products, and possibly expanding the GSEs' balance sheets to hold more of their own mortgage-backed securities.

However, the Trump administration plans to conduct an initial public offering of part of the GSEs' equity in the coming year, which may limit recent policy changes as these changes could reduce the GSEs' profitability.

Meanwhile, permitting reform legislation also has a considerable chance of becoming law in the coming months.

It will simplify the National Environmental Policy Act (NEPA), which regulates federal reviews of all major infrastructure projects, including transportation, energy and power, broadband, and water projects Overall, Goldman Sachs expects that by the end of 2026, the effective tax rate will decrease by about 2 percentage points from the current level, resulting in a level that is 9.5 percentage points higher than early 2025. The evolution of tariff and fiscal policies will become key variables determining market trends before the midterm elections, and investors need to closely monitor the timing of Supreme Court rulings and subsequent policy adjustments.