Goldman Sachs Quick Comment on Trump's Victory: Only Minor Tax Cuts Expected, Limited Economic Drag from Tariffs

1. The media has announced the results of the presidential election, with Trump winning and expected to secure 312 electoral votes. In the Senate, two seats controlled by Democrats (Ohio and West Virginia) have flipped to the Republicans, giving the Republicans a majority. The Republican candidate holds a significant lead in the Democrat-controlled seat in Montana, although the reported vote count so far is low.

In the other four Democrat-controlled seats (Michigan, Nevada, Pennsylvania, and Wisconsin), the Republican candidates have a narrower lead. This could likely give the Republicans at least 52 seats in the Senate, and if the unannounced election results maintain their advantage, they could secure 56 seats.

2. In the House of Representatives, the situation remains unclear but leans towards the Republicans. So far, the media has announced two seat flips, one controlled by Democrats and one by Republicans. Some other competitive seats have very narrow margins but have not yet been announced.

As of 2 AM Eastern Time on November 6, partial results indicate that the House margin may be very similar to the current 221R (Republican) - 214D (Democrat) composition (excluding vacancies), with Democrats likely falling short of a majority. Prediction markets currently set the probability of a comprehensive Republican victory at about 90%.

Due to potentially decisive races in California, where vote counting may take several days, the final results for the House may not be fully clear until later this week or next week.

3. If the Republicans win a narrow majority in the House, this would allow for a full extension of the 2017 tax cuts, which are set to expire at the end of 2025. We expect this to include the restoration of some expired business investment incentives, and Congressional Republicans are likely to support moderate additional tax cuts to align with some of Trump's campaign proposals, although these proposals are expected to be scaled back. The tax cuts are expected to account for only a small percentage of GDP, primarily targeting individual income taxes rather than corporate taxes.

In the case of a comprehensive Republican victory, we expect a slight increase in federal spending, particularly in defense. While a significant Senate seat advantage (e.g., 55 or 56 seats) may lead Republicans to support more cuts to other budget areas (i.e., "mandatory" spending on welfare programs), a narrow advantage in the House may pose obstacles to such plans.

In contrast, in the less likely scenario of Democrats winning a narrow majority in the House, we expect fiscal tightening to be strengthened. This is because we anticipate that in the case of a comprehensive Republican victory, moderate net tax cuts are unlikely to be realized, and some high-income tax cuts are more likely to expire at the end of 2025.

4. On tariff issues, we expect auto tariffs to be a focal point. Assuming tariffs are imposed on cars imported from the EU, this may be implemented more broadly. This combination of tariff policies is expected to provide a one-time boost to core PCE inflation, peaking at 30-40 basis points, and to moderately drag on GDP. 5. On immigration issues, we expect the incoming Trump administration to reduce immigration to about 750,000 per year, slightly below the pre-pandemic trend of 1 million. If the Democrats win a narrow majority in the House of Representatives, the expected reduction in immigration will be smaller, dropping to about 1.25 million per year. This difference arises from the larger enforcement funding that a Republican-controlled Congress may approve, which is less likely in a divided government.

6. On regulatory issues, the incoming Trump administration may adopt a more lenient approach, particularly in energy, finance, and labor policies. In contrast, while some aspects of antitrust policy may be slightly relaxed, scrutiny of the technology sector is expected to continue