Generally, macroeconomic forces have had more weight for the markets than midterm elections. However, fiscal disputes, sector scrutiny, and trade tensions that could arise under the presidency of Donald Trump, could shape the evolution of the markets long after the votes have been counted, especially if the Democrats achieve significant gains.
Midterm elections are usually considered a referendum on the person occupying the White House. There are few occasions when the sitting president has emerged unscathed: since World War II, the president's party has lost seats in the House of Representatives in all midterm elections except for two.
The first midterm elections of President Trump, in 2018, were no exception, as the Republicans lost 41 seats. History suggests that his current approval rating could lead to a similar outcome in November, far exceeding the loss of two seats that the party can afford.
The House of Representatives seems determined. The Senate does not.
The Senate is a different contest. Only about a third of the seats are up for renewal, and the states involved are as important as the national political climate. The Democrats need a net gain of four seats while defending their current positions. Tight contests in states like North Carolina and Maine offer opportunities, but vulnerabilities in other states mean they must succeed simultaneously in several key contests. For now, the Republicans remain slight favourites to maintain control of the chamber.
In any case, it is almost certain that the Republicans will lose their total control of federal institutions, namely the White House, the House of Representatives, and the Senate in November. A divided Congress remains the most likely scenario, although the balance of power in the Senate is tight enough that a victory in both chambers would not be surprising.
For investors, this distinction is important as it will influence the intensity of fiscal disputes and scrutiny over certain sectors over the next two years.
The House of Representatives is likely to change leadership, but the Senate remains very open to any outcome.
A blue chamber or two?
If the Democrats take control of the House of Representatives, they could obstruct the Government's agenda. The House could block partisan laws, initiate investigations, and set the course of political debate. However, the Republican Senate would still provide the White House with a significant defensive barrier. The result would be greater oversight, more political noise, and a higher risk of fiscal confrontation, although with limited scope to reverse the overall direction of the Administration's policies.
A Democratic victory would harden those limitations. Control of both chambers would allow the Democrats to intensify investigations and increase scrutiny.
of politically sensitive sectors and exert greater influence over appointments and nominations. Even so, President Trump would retain his veto power and broad executive powers. Therefore, Democratic control of both chambers would limit the Administration but hardly alter the direction of its policies.
For investors, the difference is likely to be one of intensity rather than direction. Both a divided Congress and a Democratic triumph in both chambers would increase political friction in Washington. This latter scenario would simply amplify those pressures. Consequently, the most significant consequences for the markets are likely to stem not from the election outcome itself, but from the subsequent political confrontations.
Institutional gridlock could translate into increased public spending.
Whatever the outcome, the debt ceiling is likely to become one of the first flashpoints for the new Congress. This challenge has intensified now that the US federal debt exceeds $40 trillion. According to the current trajectory and the extraordinary measures available to the Treasury, the deadline is likely to be reached by mid-2027. A Democratic House of Representatives would have considerable influence over any agreement, while Senate control would further strengthen that position.
However, investors should avoid assuming that political gridlock automatically implies fiscal austerity. Initially, markets might interpret that the loss of Republican control of the White House and both chambers would hinder the approval of new and broad spending packages or tax cuts, which could provide some short-term relief for Treasury bonds. This reaction would be understandable. Historically, divided governments have offered fewer opportunities for stimulus funded through deficits. But this time it could be different.
Possible fault lines are already visible. Republicans want to increase defence spending, while Democrats aim to reverse cuts to Medicaid, included in the Government's "One Big Beautiful Bill." Given the increasingly contentious nature of fiscal negotiations in recent years, neither party may be willing to make significant concessions. Therefore, a last-minute compromise could end up incorporating both demands, rather than forcing one party to back down. According to our estimates, this could increase the deficit by around 1% of GDP.
This poses a two-phase risk for Treasury bonds. Yields could initially fall after the elections, as investors price in less short-term fiscal expansion. However, they could rebound as negotiations over the debt ceiling approach and attention shifts from legislative restraint to the cost of the final agreement.
The key issue is not the additional borrowing itself, but what it reflects about fiscal discipline. If the political compromise implies ever-higher deficits rather than fiscal consolidation, investors may demand a higher term premium to hold long-term Treasury bonds, leading to a structurally steeper yield curve.
influence on the overall evolution of the US variable. Profits, growth, inflation, and interest rates have been much more important. Therefore, the most credible consequence of the midterm elections is a greater dispersion among sectors, rather than a substantially different result at the aggregate level.
By controlling the House of Representatives, the Democrats could initiate investigations and hold hearings. But extending their influence to the Senate would broaden that oversight, putting the committees of both chambers under party control. The result could be especially important for politically sensitive sectors, such as energy, healthcare, and technology. In line with this, our analysis suggests that these sectors have often evolved in parallel with changes in the odds of the Democrats controlling the Senate.
