U.S. Midterm Elections: 10 Things that Matter for Markets and Economies

1. Democratic sweep is the base case

In our view, this election is largely about affordability. Increased prices for fuel at the pump and food at the grocery store are clear and salient reminders of the rising cost of living that are hard to shrug off. We arrived at our base case even with an unprecedented amount of money funding certain Republican campaigns. We see the combination of higher fuel and food prices, broader inflationary challenges, and higher borrowing costs presenting challenges for Republicans as indicated across major polls. All told, major probability models, betting markets, and political polls are now pointing to a Democratic sweep when just a few months ago they were looking for Republicans to hold the Senate. Still, we recognize that Democrats taking the House is far less of an uphill battle than taking the Senate, where they must win a significant number of elections in states President Trump won in 2024 while also defending several competitive seats.

Exhibit 1: Democrats' path to a Senate majority must go through states Trump won

2. Congress will likely remain largely gridlocked from a legislative policymaking perspective

A divided government makes legislation even more challenging to turn into law. Further, a potential slim majority in either chamber would grant significant power to the left-leaning wing of the Democratic caucus when trying to build a majority. However, as we discuss below, a “gridlocked” Congress can still make a lot of noise that can impact markets.

3. Deficit risks still to the upside

Deficits are already running at historically high levels, which have contributed to the rise in long-term bond yields this year. These market pressures, however, have not led to a growing political chorus for fiscal reform. There are just not many fiscal hawks left in D.C. in either party. We think there is enough agreement in areas like defense, infrastructure, and cost of living adjustments that deficit outlooks could end up higher post-election than before.

Exhibit 2: U.S. fiscal risks tilt to the upside, regardless of election outcome

4. Executive action will be the policy lever of first and last resort

Even if the Democrats only take the House and do not gain control of the Senate, the Trump administration is likely to lean more on executive actions more than it already has. This means more tariffs are probably coming, with the average effective rate perhaps rising back towards the mid-teens level. It could also mean more aggressive foreign policy actions, starting with renewed escalation in Iran.

5. AI regulation and data center restrictions may emerge

Both parties are scrutinizing AI, but where they’ll land on regulations, guardrails, and oversight remains an open issue. Congressional Republicans’ views on data centers, for example, continue to evolve and may pivot back to more of a light regulatory approach after the election. The list of possible measures (e.g., independent audits, safety guidelines, environmental reviews) remains wide. Split government likely means more moderate restrictions that could somewhat slow AI development without derailing the story entirely. A slower-for-longer AI capex cycle seems to us a reasonable outcome.  

Exhibit 3: As both parties scrutinize AI, public sentiment on data center construction skews negative

6. Investigations will be micro rather than macro stories

Democrats will gain investigation authority. This is unlikely to have macro implications, but it could provide volatile headlines for certain sectors and firms. Democrats have signaled crypto, betting markets, and businesses tied to high-ranking officials are at the top of the list. As an aside, if Democrats do take the Senate, they will also gain confirmation authority. The administration may respond by putting through more moderate candidates, but ultimately, many positions will not be filled with confirmed officials.  

7. Populist alliances may create new business challenges

Left-of-center Democrats and right-of-center Republicans are likely to propose policy ideas that create new challenges for businesses. We saw this in the last congress when Senator Elizabeth Warren (D-MA) agreed with President Trump on the role of private equity in housing and published an article on Social Security reform with Senator Bernie Moreno (R-OH). While gridlock may slow down some of these policy proposals, they may also spark uncertainty that impacts business decisions.  Expect certain private credit topics, housing, and anything that connects Wall Street to affordability issues to be on the menu. Many of these policy initiatives will be conducted with an eye towards winning on the affordability issue in the 2028 presidential election.

8. Fed independence likely gains some additional protection

We do not assess the current risks to Fed independence as particularly high. Chairman Kevin Warsh is hiking rates despite public political pressure, and the Department of Justice has opted not to reopen a probe against Governor Jay Powell. Still, a Democrat majority in the Senate potentially provides some additional, incremental protections to the Fed — particularly given that Democrats will have to give their stamp of approval on any future picks for Fed governors. If the Senate remains under Republican control, many of the moderate Republican voices who pushed back on Trump’s attacks on Fed independence will be gone, and the Trump administration may try to flex its influence over the Fed more aggressively, but incrementally. It is worth noting that the door has not fully closed on challenges at the Fed, as the administration is still pursuing legal action against Governor Lisa Cook.  

9. Shutdown risk remains very high

Democrats and Republicans will need to work together to pass a budget. This will likely be harder in an environment where Democrats feel momentum after the midterms, and a small Democratic majority would grant enormous influence to the far left on close calls. The government shut down for a record length in 2025 — an example of how both sides are willing to hold out in a negotiation in the current political climate. Shutdowns do not tend to have large economic implications because lost activity is largely recovered after the government reopens. However, they can lead to uncertainty and volatility in economic data.

10. The next debt ceiling standoff may be the most fraught in history

More left-leaning Democrats are likely to feel emboldened coming off their midterm victories, potentially paving the way for a historical debt ceiling battle next year. Debt ceiling standoffs run the risk of technical defaults, government downgrades, and volatile markets. Our best estimate is that the next X date will likely hit in mid to late summer of 2027.