Key Points:
- Bank of America predicts the upcoming midterm elections will heavily influence Washington on trade and foreign policy.
- Rising gas prices caused by the conflict in Iran threaten voter support as election day approaches.
- Analysts expect effective tariff levels to settle between 6% and 8% following recent court rulings.
- New tariff measures under Section 232 and Section 301 will likely face less aggressive enforcement.
The fast-approaching United States midterm elections are forcing politicians in Washington to rethink their strategies. A new research note from Bank of America highlights how the political calendar now dictates major decisions on both foreign policy and international trade. As voters prepare to head to the polls, lawmakers want to avoid making any sudden moves that could hurt the economy or anger the public.
Claudio Irigoyen, a top analyst at Bank of America, told clients that the upcoming election is a crucial factor in government action. He explained that politicians care deeply about how global events impact everyday Americans. Right now, conflict-related risks threaten to push gas prices even higher. Expensive fuel often causes voters to punish the political party currently holding power.
The ongoing war involving Iran sits at the center of this political calculation. Irigoyen wrote that the longer the war continues and the closer the country gets to the midterms, the more likely high gas prices will affect the election results. American drivers feel the pain every time they fill up their cars. Because of this, the United States government faces intense pressure to find a solution and bring fuel costs down.
However, finding a quick end to the conflict remains difficult. Bank of America noted that Iran also understands the American political calendar. The Iranian government might adjust its own military and diplomatic strategy to exploit this pressure, making a fast resolution very unclear. The two sides play a complex waiting game as the American election date moves closer.
Despite these complications, Bank of America still holds a somewhat optimistic base case. The bank assumes diplomats will find a resolution to the conflict in the next few weeks. At the same time, the research note issued a strong warning to investors. Analysts believe financial markets currently underprice the serious risks of a more extended conflict. If the war drags on through the summer, stock prices could fall, and energy markets could experience severe shocks.
Beyond the Middle East, the midterm elections also shape how the United States handles global trade. Bank of America noted that the need to win votes might keep strict tariff policies in check. Politicians know that aggressive tariffs often raise the price of imported goods for American shoppers. With inflation already a sensitive topic, lawmakers want to avoid anything that would make household items more expensive.
The government faces several important trade-related deadlines this summer. Section 122 tariffs will officially expire in July. Meanwhile, Washington plans to introduce new measures under Section 232 and Section 301. Despite these new rules, Irigoyen told clients he expects the midterms to lead to much less aggressive tariff enforcement. He pointed out that the government already sees a noticeable drop in tariff revenues, and this downward trend will likely continue.
Recent legal decisions also cap how much the government can tax imported goods. Following the major court ruling on the International Emergency Economic Powers Act, Bank of America expects effective tariff levels to drop. The bank predicts these taxes will settle in the 6% to 8% range. This lower rate provides some relief to American businesses that rely on foreign materials to manufacture their products.
While the overall trade picture looks calmer, the bank still flagged a few upside risks. Recent trade tensions between the United States and the European Union could easily escalate. If European leaders and American officials fail to reach common ground on key issues, new tariffs could hit specific industries. Investors need to watch this relationship closely as the year progresses.
To figure out the next market moves, Bank of America advised clients to watch two immediate catalysts. First, the upcoming factory orders report will show whether American manufacturing is growing or slowing. Second, investors should listen closely to upcoming comments from a prominent Federal Reserve official. These speeches often reveal how the central bank plans to manage interest rates amid shifting trade policies and global conflicts.
