What investors expect from Trump
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Donald Trump is set to take office in a month and a half. So what are investors expecting from the second Trump administration? I'm Alison Nathan, and this is Goldman Sachs Exchanges. Here with me today is David Miracle, Chief U.S. Economist with Goldman Sachs Research. David, welcome back to the program. Thank you very much, Alison.

So, obviously, we've seen a very positive market reaction post the election of Donald Trump, at least in U.S. equities. But here at Goldman Sachs, we took the initiative to actually try to survey investors to see what they are expecting. So before we get into the findings of that survey, talk to us a little bit about

the survey, how you made it, who did it go to? Give us some details. Sure. So we have our own policy expectations for what might change under the second Trump administration. But we wanted to understand what are investors thinking? What assumptions

underlying market pricing. And so in conjunction with our marquee team, we surveyed over 500 people and we asked them about the whole range of issues that we think are most macroeconomically significant, immigration policy, trade policy, and fiscal policy, to try to get a sense of our

Are they looking for more or less the same policy changes as us or where might views differ? And so what are investors most nervous about in that survey? So we actually asked this question, which of the potential policy changes worry you the most in terms of their macroeconomic consequences for 2025? The runaway winner with 60% of the vote was the prospect of a universal 10 or 20% tariff on all goods from all countries.

That's not our baseline. It's not most investors' baseline either, but that was cited as the top risk. Other big risks, which came in quite a bit lower on the ranking, were

concerns about fiscal sustainability being triggered by some sort of fiscal move or concerns about deportations of unauthorized immigrants having a negative effect on growth and a positive effect on wages and inflation. Trump already announced 25% tariffs on all imports from Mexico and Canada. I don't think we were expecting that. Were investors expecting that or they might be nervous about the universal tariff? Are they actually expecting a universal tariff?

No. So we asked two questions. First, what was your baseline expectation for the combination of tariffs we might see? And second, what probability do you put on that universal tariff? Most investors are looking for basically what we're looking for. Some additional tariffs on imports from China and some additional imports on autos because autos, as we've seen in the recent elections, are a very politically sensitive industry. There is a substantial minority of investors who said,

that their baseline also includes some version of the universal tariff,

all goods from all countries, but that was not the modal view at the very least. Now, in the follow-up question where we asked what probability would you put on a universal tariff, the average response was 35%, so a little bit below our own 40%. And I think that just captures this is a serious proposal and it is a serious risk, and that's why people are very focused on it, but it's not the modal view in markets. But even that 25% announcement was unexpected and important.

important. Yeah, it's a thread. It's not yet been implemented. There were a lot of things that were proposed at one point during the first Trump administration that didn't get fully enacted. So I think still not part of our baseline that those 25% tariffs on imports from Mexico and Canada will go into effect. But I imagine we'll hear a lot of proposals like this along the way. Interesting. So obviously, immigration policy is also at the top of Trump's list. It's on investors' minds, as you said. Trump

Trump's been quite vocal about wanting to tighten immigration policy. So what are investors expecting and how does that compare to what we are expecting on immigration policy? Sure. Let me just give a little bit of background because we included this question in part because it's an important policy issue for the president-elect, but also because it has been an important macroeconomic issue for the U.S. over the course of the last couple of years. Pre-pandemic, total net immigration, unauthorized plus authorized, increased.

into the U.S. was about a million a year. A little bit higher sometimes, a little bit lower sometimes, nothing too dramatic. Higher typically when the U.S. economy is booming and jobs are readily available. Lower, for example, after 2008, when if you come here, you're certainly not guaranteed to get a job. Now, in 2023, net immigration was about, we think, 3 million into the U.S., so triple what it would have been in a normal year.

At the very peak in late 2023, the annualized rate got up to about three and a half to four million. We've already seen that come down very sharply to an annualized rate of about

of about 1.75 million. So it is already, even before Trump takes office, been roughly cut in half. So that's just a little bit of background to help you make sense of the numbers. Now, we're assuming that under the second Trump administration, net immigration will average, and this is total, authorized plus unauthorized, will average about 750,000 a year. Relative to 2023, a lot lower. Relative to the pre-pandemic norm,

a little bit lower, but not dramatically lower.

It turns out that's also what most investors expect. The most frequent answer from about half of the people we polled was half a million to one million, and then the vast majority of people were either in the bucket just below that or just above that. Only about 6% of poll respondents expected net immigration to turn negative. Now, one thing that trips people up is that they read in the news about deportations and they say, oh, so you don't expect deportations.

I think everybody does. There are always some deportations of unauthorized immigrants taking place. Those will probably be at the high end of the range we've seen over recent presidential administrations, if not a bit higher. But bear in mind, there's always probably some inevitable inflow of unauthorized immigrants and authorized immigration amounts to about 750,000 a year. So our estimate and the median investor's estimate would suggest

Maybe authorized immigration stays roughly unchanged. The unauthorized part gets down to about net zero. Interesting. Okay. So 750 is all authorized essentially in our expectations. Exactly. And again, it's a big change relative to 2023. It's not necessarily a big change relative to what we saw in the pre-pandemic decades. Let's talk tax cuts. I think it's widely expected that the 2017 tax cuts are going to continue. Yeah.

But what else are investors expecting on top of that? Are they more optimistic that they will see more tax cuts? So nearly everyone expects the 2017 tax cuts to be extended. About two-thirds of our survey respondents expected them to be extended in full. About one-third expected them to be extended in part.

Now, above and beyond that, there are a bunch of other potential tax cuts because there were a lot of proposals that were brought up during the campaign. No tax on tips, no tax on overtime, no tax on social security, and various other proposals like this. There are also some that are always part of the discussion, like increasing the state and local tax deduction. Our assumption, and this turns out to also be the assumption of most investors, is that there will be some additional tax cuts, but

but that they won't be huge in size. So we're assuming something like 0.2% of GDP or about $60 billion in additional tax cuts because we suspect that Republicans would be concerned that if they don't deliver on some of the campaign proposals,

That would antagonize voters and it would cost them in the next election. Why not something even bigger? Why not the full-blown tax cut agenda? To my mind, the main reason for that is that the starting point for US fiscal sustainability is very different and a lot more concerning than the first time that Trump took office. We already have a primary or X interest

federal fiscal deficit that is about 5% of GDP, wider than it has historically been when the economy has been equally strong and the unemployment rate's been around 4%. We have a debt to GDP ratio that is quickly closing in on a new all-time high. And the thing that arguably gets us into the most trouble of all, we now have interest rates across the curve that are about double what most people were assuming the last time President-elect Trump was in office.

And so you take all of those things together, it makes for a not great outlook for the debt to GDP ratio, for interest expense as a share of GDP. And I think that will probably constrain what Congress is willing to do in terms of further unfunded tax cuts or spending increases. Something to make good on campaign proposals, but...

not enough to really shake up the macroeconomic picture. That's our view. And that turned out to also be most investors' view. Let me just ask a quick follow-up question on corporate taxes. Are investors expecting corporate tax cuts? That was such a big policy shift when Trump first came into office. Yeah. So many were, although I guess I would caution that could mean different things to different people. So maybe we should have phrased this question a little bit better.

Last time Trump was in office, there were proposals to lower the corporate tax rate all the way down to 15%. They lowered it to 21%. We think it's very unlikely that will go all the way to 15%. So if that's what people had in mind,

I guess I'd say we disagree with that, but it is possible it could be reduced to 20%. And we also think it's pretty likely that the manufacturing tax rate, that specifically could come down to 15%. That's not the entire economy. That's just one sector. But that part we think is possible. A lot of people did expect further corporate tax rate cuts, but that could have meant something more substantial or more moderate. And if people meant more moderate, then I would say, I think that's reasonable.

So in the context of these fiscal issues that we're already facing, obviously there's a lot of focus on the other side of the ledger in terms of government spending. And there is this new government efficiency department. We don't really know what that's going to look like at this point. What are investors expecting from that? And what are you expecting from that given how new that initiative is? I would say this is definitely the question where people had the least sense of what to make of it, where views were the most widely varied.

Answers were really pretty spread out. I would say a lot of people, probably about 45% of people expected either insignificant cuts or quite small cuts.

That probably aligns most closely with our view. Beyond that, it was not a popular view that this would save a huge amount of money, but I would say that it was maybe 10% of the survey response in each of several buckets from 25 to 100 billion, 100 to 200 billion, 200 to 300, 300 and above. So wide ranging views, understandable for something that's so new. Yeah.

And you've actually pointed out that there are some real limits to cutting spending. Tell us about that. I think if you're not interested in cutting defense spending and you're not interested in cutting entitlement spending, then certainly getting to the kinds of numbers that they've been talking about seems very unlikely. But the remaining part, I think it would be more challenging to cut an amount that's substantial enough to really have a large macroeconomic impact.

So that's the policy expectations. How does this all read through to inflation? Sure. So on inflation, I think by far the most important policy is tariffs. Now, I would emphasize that tariffs are a one-time effect on the price level, but just in terms of, and therefore a one-time inflationary effect, but just quantitatively in terms of the impact on prices next year, I think that's likely to be much more significant than changes to fiscal and immigration policy.

Under our baseline, where we get further tariffs on imports from China at an average rate of 20 percentage points, or

an average increase of 20 percentage point, plus some additional tariffs on autos, most likely from the EU, we think that would raise the US's effective or average realized tariff rate by three to four percentage points. Now, we've run this experiment before, of course, during Trump's first term, and we've looked back at the lessons learned from the impact of tariffs on prices back then

And our rule of thumb is that every one point increase in the effective tariff rate is worth about one-tenth of a percentage point on the price level. If we get the policies we're looking for in our baseline, that three to four percentage point increase would be worth three to four-tenths

on the price level, and if that all happens pretty quickly, as it probably would, that would mean at the peak, you get a three to four tenths boost to inflation. That's not huge. It shouldn't be that hard to say, at least in the case of the consumer tariffs,

This is roughly the effect of the tariff, and we know that by comparing tariffed items to non-tariffed items. And the inflation boost would come on top of an underlying trend that we think would otherwise be declining from the high twos to the low twos. So this would cause us to wind up more in the mid twos than the low twos, but certainly not to take us back to the levels that we saw in prior years.

Now, if we do get the universal tariff, the impact of that on the average tariff rate is about triple the impact of the other two policies combined. So that gives you a good sense of why this is the key risk, the key wildcard for 2025. It's simply much larger than the other tariff policies we're talking about. And the impact of that on prices would also be roughly triple. We think that would raise the price level by about 1% and probably push inflation at the peak

a little bit above 3%, although again, I would emphasize this is still a one-time effect. And how about economic growth?

In terms of the impact on growth, the impact of the policy changes that we've talked about today, we think on a two to three year horizon would be roughly offsetting. The catch is that the things that would have a negative impact on GDP, namely just fewer immigrants, fewer workers and tariffs, those can be done more through the White House's authority. So that could happen more quickly. Whereas the things that would have a positive impact on GDP, namely the tax cuts,

That has to go through Congress, so that's not going to happen as quickly. That probably means that in 2025, you get more of the negative effects. In 2026, you get more of the positive effects. But on a multi-year horizon, we would say these things are roughly offsetting, that they don't really substantially change the growth trajectory of the U.S. economy. And so we think about the implications of this for the Fed, our views versus investors' expectations.

Are we differentiated? I think this is probably where our views differ the most. On policies, what I learned from doing this survey is that actually the market consensus is pretty close to our view on what will actually happen. Where I think we differ is on the assumption, the inference that many investors seem to make that tariffs mean higher inflation and therefore higher interest rates. Obviously, there's a lot of appeal to that logic. I just think that the risks are a little bit more two-sided.

than people are appreciating. And I say that for three reasons. First, if we get the tariffs we have in our baseline, again, the impact on inflation is just not that big. We're talking about 30 to 40 basis points. It would be on top of a otherwise falling underlying trend, and the effects should be pretty discernible in the category level details. Second point I would make is this is clearly a one-time price level effect. So at some level, the central bank is not supposed to respond

unless this really unsettles inflation psychology or inflation expectations. And if we're talking about inflation actually coming down from where it is on net now, just coming down less, it's not clear why that would unsettle inflation expectations. The third point I would make is that the assumption that tariffs mean higher interest rates, that's exactly the opposite of what happened in 2019. The last time that the first Trump administration imposed tariffs

The equity market really didn't take it well. Financial conditions tightened quite a bit, and the Fed decided to prioritize the risk to growth from a tightening in financial conditions, the risk to the labor market from that tightening in financial conditions, over the impact of a moderate one-time price level increase. Some things are different. The rate of inflation is higher now than it was back then, of course. The threatened tariffs are probably larger than they were back then.

It's not clear to me that the risks are as one-sided as people think. So I would say in the very near term, we're expecting the Fed to cut in December. I think it's a little bit ambiguous what they'll do immediately after that. We have additional consecutive cuts in our forecast for Q1. Recent Fed commentary suggests they're thinking about trying to find the right point in time

to slow the pace of cuttings. Could be when we're forecasting, could be a little bit earlier. But I am comfortable with the message from our Fed forecast relative to market pricing, that market pricing looks a little bit too hawkish. And I think expectations about the economic and monetary policy consequences

of the policy changes that we've discussed today is probably at the heart of the disagreement. Most people take fewer immigrants, tax cuts, tariffs to be inflationary and therefore imply higher rates. There is, of course, some logic to all of that that does make a good amount of sense. But I would just say the consequences to us look like they are not big enough to

that it would be prohibitive for the Fed to cut. And I think people are underweighting the potential risks to the downside to the economy and to markets that could trigger another episode comparable to the 2019 insurance cuts when the Fed basically said, we're not in a recession yet, but there is a substantial risk to the economy that we want to counteract by easing monetary policy a little bit. In other words, providing insurance against a further downturn.

And that risk should really be reflected in market pricing too. So our views are a bit more dovish than market pricing. And over the medium term, I'm quite comfortable with that message. David, thanks so much for joining us. Thank you very much for having me. This episode of Goldman Sachs Exchanges was recorded on Wednesday, December 4th, 2024.

I'm your host, Alison Nathan. And tune in this Friday for the final episode of our four-part series on the changing dynamics at the intersection of sports and finance. We'll be discussing the business forces driving the growth in women's sports, which have seen record-breaking game attendance and viewership. Thanks for listening.

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