What investors expect from Trump

Episode Summary

Executive Summary: Goldman Sachs surveyed 500+ investors on likely second-Trump policies and found consensus near Goldman’s baseline on tariffs, immigration, and fiscal policy, but with the biggest disagreement over market implications. Investors see tariffs—especially a universal tariff—as the key inflation risk, while Goldman argues the macro effects of tariffs, deportations, and tax cuts mostly offset over time, leaving the Fed with room to keep cutting rates and markets likely too hawkish.

Main Topics: Investor expectations after the 2024 election (Priority: 5/5): The episode opens with a comparison between Goldman Sachs Research’s policy baseline and investor sentiment, using a survey of more than 500 respondents to gauge assumptions behind market pricing. Tariffs as the biggest macro risk (Priority: 5/5): Investors’ top concern is a universal 10%–20% tariff on all goods from all countries; Goldman’s baseline is narrower, focused on China and autos, with the universal tariff treated as a serious but non-modal risk. Immigration policy and labor supply (Priority: 4/5): The discussion frames immigration as both a political priority and a macro issue, with Goldman expecting net immigration to slow sharply from 2023 but remain positive, broadly matching investor expectations. Tax cuts and fiscal constraints (Priority: 5/5): Nearly all respondents expect extension of the 2017 tax cuts, plus some additional but limited tax relief. Goldman argues fiscal sustainability, high debt, and elevated interest rates will constrain any large unfunded tax package. Government spending cuts and 'efficiency' efforts (Priority: 3/5): Views are highly dispersed on the new government-efficiency initiative, with many respondents expecting only small or negligible savings and Goldman seeing structural limits to major spending reductions. Inflation, growth, and the Fed (Priority: 5/5): Goldman says tariffs are the main inflationary force but likely only a one-time price-level effect. Growth impacts should offset over 2–3 years, and the Fed may be able to keep cutting despite market expectations of a more hawkish path.

Key Arguments: Most investors’ baseline policy expectations are close to Goldman Sachs Research’s own assumptions, especially on tariffs, immigration, and tax policy. The universal tariff is the single biggest policy risk because its effect on the average tariff rate and prices would be much larger than targeted tariffs. Immigration is already slowing sharply from the 2023 surge, and Goldman expects net immigration to normalize to levels only modestly below the pre-pandemic era. Large new tax cuts are constrained by a wider fiscal deficit, higher debt-to-GDP, and much higher interest rates than when Trump first took office. The new efficiency/spending-cut agenda is too vague and politically constrained to generate large fiscal savings, especially if defense and entitlements are off-limits. Tariffs raise prices mainly once, not persistently; Goldman estimates the baseline tariff plan would add only 30–40 bps to the price level. Growth effects from fewer immigrants/tariffs and from tax cuts are likely offsetting over a multi-year horizon, with 2025 seeing more downside and 2026 more upside. Markets may be overpricing the inflation and rate effects of Trump policies; Goldman sees more room for Fed cuts than current pricing implies.

Data Points: Survey size: Over 500 respondents - Goldman’s investor survey on second-Trump policy expectations Tariff concern share: 60% - Percentage of respondents who said a universal 10%–20% tariff was the biggest macro risk Universal tariff size: 10% or 20% - Potential tariff rate on all goods from all countries discussed as the biggest risk Probability of universal tariff: 35% - Average probability investors assigned to a universal tariff Goldman probability of universal tariff: 40% - Goldman’s own probability estimate referenced for comparison Net immigration pre-pandemic: About 1 million per year - Typical annual net immigration into the U.S. before the pandemic Net immigration in 2023: About 3 million - Estimated net immigration into the U.S. in 2023 Peak annualized immigration rate: About 3.5 to 4 million - Late 2020 annualized immigration peak mentioned in the discussion Recent annualized immigration rate: About 1.75 million - Observed decline in immigration before Trump takes office Goldman net immigration baseline: About 700,000 to 750,000 per year - Expected total net immigration under the second Trump administration Most common investor immigration expectation: Half a million to 1 million - Most frequent response among survey respondents Expect no immigration decrease to negative: 6% - Share of respondents expecting net immigration to turn negative 2017 tax cuts extension expectation: Nearly all respondents; about two-thirds full extension, one-third partial - Survey results on extending the 2017 tax cuts Additional tax cuts assumed by Goldman: About 0.2% of GDP or $60 billion - Goldman’s expected size of extra tax cuts beyond extension of the 2017 law Current primary fiscal deficit: About 5% of GDP wider than historical norms - Fiscal starting point cited as unusually weak in a strong economy Federal debt-to-GDP: Closing in on a new all-time high - Describes the U.S. debt trajectory entering the second Trump administration Interest rates versus prior Trump term: About double - Current rates across the curve compared with assumptions in the first Trump term Corporate tax rate: 21% current; 15% unlikely; 20% possible - Discussion of potential corporate tax changes under the new administration Manufacturing tax rate: 15% - Goldman sees a sector-specific manufacturing tax rate cut as plausible Government efficiency savings expectations: About 45% expect insignificant or small cuts - Largest survey cluster on the new spending-cut initiative Tariff impact on realized tariff rate: 3 to 4 percentage points - Goldman baseline estimate for the increase in the U.S. effective tariff rate Tariff pass-through rule of thumb: 0.1 percentage point on the price level per 1-point tariff increase - Goldman’s estimate of tariff pass-through from prior experience Baseline tariff impact on price level: 0.3 to 0.4 percentage points - Estimated effect of targeted tariffs on the overall price level Universal tariff impact on price level: About 1% - Estimated effect if a universal tariff were imposed Universal tariff peak inflation: A little above 3% - Estimated peak inflation effect under the universal-tariff scenario Underlying inflation trend: High 2s to low 2s - Goldman’s baseline path absent new policy shocks Growth horizon: 2 to 3 years - Timeframe over which Goldman says policy effects are roughly offsetting Fed expectation: Cut in December, then additional consecutive cuts in Q1 - Goldman’s near-term rate path forecast

Pivotal Quotes: "The runaway winner with 60% of the vote was the prospect of a universal 10 or 20% tariff. On all goods from all countries." — David Miracle: Explaining what investors feared most in the policy survey "Our estimate and the median investors' estimate would suggest maybe authorized immigration stays roughly unchanged. The unauthorized part gets down to about net zero." — David Miracle: Clarifying Goldman’s immigration baseline and how investors interpret deportations "I think this is probably where our views differ the most." — David Miracle: Introducing the biggest divergence between Goldman’s view and market pricing on Fed implications

Implications: Investors should focus less on broad policy headlines and more on whether tariffs stay targeted or become universal. Goldman sees limited inflation persistence, offsetting growth effects, and more Fed room to ease than markets imply.