Wall Street Braces for New Tariffs, Iran Escalation and Shutdown Risk

Goldman Sachs expects the US effective tariff rate to rise by a little under 2 percentage points after this week's midterm elections, even if Democrats claw back congressional power. The bank's economists, Alec Phillips and Abhay Duggirala, told clients on Monday morning that President Trump will announce new tariff increases after the vote that more than offset any Democratic-led reductions.

The call comes despite polling that points to a Democratic comeback. Harvard University's election model gives Democrats a 96% chance of taking the House and a 78% likelihood of capturing both the House and the Senate. Wall Street still expects Trump to double down on his less popular policies once the ballots are counted, though analysts have been wrong before.

"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," Phillips and Duggirala wrote.

"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."

Why tariffs are climbing back up the agenda

Fiscal pressure is the mechanism. The Middle East conflict is proving expensive, and it sits against $40 trillion in national debt. Budget hawks want deficits cut to 3% of GDP from the current 6%. Tariffs, in this environment, become an increasingly important revenue source in the coming months.

ING's James Smith told clients that fiscal gridlock in a more divided government will push attention back to trade policy and squeezing more revenue out of import relationships.

"Remember tariffs?" Smith wrote. "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."

The mechanism matters here. The Supreme Court struck down the emergency tariffs. The temporary 10% blanket rates then hardened into a permanent structure under Section 301. That framework remains in place, and it gives the administration a ready tool if it wants more revenue.

What happens with Iran after the vote?

The White House's course in the Middle East after the midterms remains unanswered. UBS's Paul Donovan argued the president may become more aggressive in the Gulf war "once freed from the pursuit of popularity."

Public support is thin. A Pew Research study last month found just 14% of voters strongly approve of Trump's handling of the military conflict with Iran, with a further 20% saying they "somewhat" approve. With voters disenchanted, Trump's remaining motivations for the conflict lie in national security and his personal legacy.

"Where markets will want to focus is on the Republican reaction to the results," Donovan said. "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 war bill keeps growing. Recent reports put the cost of the Iran conflict at $47 billion. A conflict initially outlined as a matter of weeks now stretches into months.

Is a government shutdown coming?

Deutsche Bank flagged two fiscal deadlines in a Friday note to clients. First, 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 must be dealt with before late summer or fall of next year.

Second, federal government funding runs out on December 11, requiring bipartisan support for a continuing resolution to prevent a shutdown.

The clock started on September 2, when Trump signed the Continuing Appropriations and Extensions Act. That law funded federal agencies through a 72-day window ending December 11.

What it means for markets

Investors face three overlapping risks: a tariff increase that raises costs for importers, an Iran conflict that inflates defense spending, and a shutdown deadline that requires the very bipartisan cooperation a divided Congress may not deliver.

The Goldman Sachs view frames the trade-off plainly. If the effective tariff rate rises nearly 2 percentage points while fiscal gridlock blocks deficit reduction, tariffs become one of the few revenue levers the administration can pull without Congress. Expect importers and trading partners to price that in before December 11.