Bank of America told clients in a research note that the U.S. political calendar - and specifically the approach of midterm elections - is increasingly influencing policy decisions in Washington. The bank highlighted two areas where elections could be material: how the U.S. responds to ongoing conflicts that threaten energy markets, and the trajectory of tariff policy.
Analyst Claudio Irigoyen told clients that as a conflict endures and the midterms draw nearer, the chance that rising gas prices feed through to political pressure grows. BofA said that dynamic could shape the governments approach to the confrontation, although it cautioned that the adversary in that conflict could also shift strategy - a factor that makes a rapid resolution unclear.
Despite those uncertainties, BofA noted its baseline outlook still assumes a resolution in the next few weeks. The bank added, however, that markets may be underestimating the possibility of a more prolonged conflict, which would carry additional risks for energy markets and broader investor sentiment.
On trade matters, BofA identified the midterms as a moderating force for tariff aggression. The note emphasized that Section 122 tariffs are due to expire in July, and that further measures may be introduced under Sections 232 and 301. Irigoyen wrote that the elections could reduce the likelihood of harsher tariff policies, and that the recent decline in tariff receipts is likely to continue.
Following a ruling on IEEPA, the bank expects effective tariff levels to settle in the 6-8% range. At the same time, BofA flagged upside risks to that assessment connected to recent frictions with the European Union.
Finally, the note pointed to near-term market catalysts, including upcoming factory orders and comments from a Federal Reserve official. These data points and remarks, BofA suggested, could influence market positioning as political and geopolitical developments continue to unfold.
Clear summary
Bank of America says the approach of the midterm elections is likely to shape U.S. responses to an ongoing conflict that could push gas prices higher, and may also restrain new, aggressive tariff actions - with effective tariffs anticipated to settle around 6-8% but subject to upside from EU tensions.
Key points
- The midterms are becoming a relevant factor in Washington's decision-making on foreign policy and trade.
- BofA expects effective tariff levels to normalize near 6-8% after the IEEPA ruling, while noting potential upside risks tied to EU tensions.
- Near-term market catalysts include upcoming factory orders and remarks from a Federal Reserve official, which could interact with political and geopolitical developments.
Risks and uncertainties
- Conflict duration risk - If the confrontation extends, gas prices could rise further, creating political pressure and market risk; this primarily affects the energy sector and energy-sensitive industries.
- Tariff policy upside - Tensions with the EU could push effective tariff levels above BofA's 6-8% expectation, impacting trade-exposed manufacturing and multinational firms.
- Market underpricing - BofA warns markets may be underestimating the chance of a longer conflict, which could amplify volatility across commodities and financial markets.