U.S. midterms: what a democratic congress means for the markets

The midterm elections have reshaped Washington’s political landscape. Democrats have regained control of both chambers of Congress, although some House seats have yet to be decided, and Donald Trump faces the second half of his term with less room to legislate.

For investors, the question is how much of this change will translate into lasting market moves and how much will amount to political noise. Most of the asset managers surveyed agree that US midterms matter less than the media spotlight suggests, and that energy, inflation and Federal Reserve policy will continue to set the course. They differ on which sectors are most exposed and which risks could alter the base case.

What changes in Washington after the midterm elections?

The main effect is gridlock, not a shift in direction. Ombretta Signori, Head of Macroeconomic Research and Strategy at Ofi Invest AM, notes that Trump will retain his veto power and that Democrats lack the supermajority needed to override it, meaning they will be unable to impose their agenda on tariffs or restrict military operations against Iran.

Mike Bell, Head of Market Strategy at RBC BlueBay, points out that Democrats also lack the seats to launch impeachment proceedings, although Kansas has elected a Democratic senator for the first time since 1939. Signori adds that losing the House closes off the budget reconciliation route, which allows fiscal measures to pass by a simple majority, at least until 2029.

How have markets reacted to the US midterms?

The initial reaction has been muted. According to Andrew Jackson, Chief Investment Officer at Vontobel, the S&P 500 was down 0.5%, the 10-year Treasury yield stood at 4.94%, and the dollar was trading at 0.89 euros at 7:00 a.m. (CET). Bell believes the political shift is unlikely to drag markets down.

The team at T. Rowe Price, comprising Blerina Uruçi, Chief U.S. Economist; Tim Murray, Capital Markets Strategist; and Gil Fortgang, Associate Analyst in Washington, believes that fiscal pressures, competition for capital, and sector developments will carry more weight. With a divided government, they expect negotiations over the debt ceiling and spending to take center stage.

In fixed income, Jackson notes that a divided government could support Treasury bonds by limiting spending, although blocking new spending is not the same as reducing the existing deficit. He adds that inflation and Fed policy are likely to matter more to bonds than the election outcome.

Which sectors could gain or lose under a Democratic Congress?

Signori (Ofi Invest AM) sees the most tangible effects in a handful of sectors. In healthcare, restoring the enhanced subsidies under the ACA would benefit insurers, although it would require the White House's approval, while pharmaceutical companies could face more investigations into the prices negotiated with the administration. In banking, Democrats could take control of the financial services committees and delay deregulation, with the ultimate impact likely to be limited.

In technology, the outlook is mixed. Signori believes the outcome is unlikely to change the prospects for big tech companies, although he expects greater scrutiny of competition, data, and energy consumption, as well as possible obstacles for utilities due to electricity costs. Sebastian Paris Horvitz, Head of Research at LBP AM (a shareholder in LFDE), does believe that a decisive Democratic victory could dampen momentum in some major sectors, such as artificial intelligence, where the party would seek to introduce regulations.

In defense, Signori expects growth in appropriations to slow, not cuts. In energy, he expects greater support for renewables and delays to reforms of permitting for oil, gas, and electricity infrastructure.

Which risks matter more to markets than the election outcome?

The first is geopolitical. Bell warns that the greatest threat would be for Trump, with the elections already behind him, to intensify the escalation in the Middle East: if energy prices rose, stocks and bonds could both suffer. Jackson shares this assessment: a tougher U.S. response to Iran after the midterm elections represents a significant risk that could drive up oil prices and inflation.

Paris Horvitz adds a nuance. Following the announcement of negotiations with Iran, Brent fell by more than $9 to $104, and European gas prices dropped to €94/MWh. A faster-than-expected easing in energy prices should be positive for risk assets, particularly for the more cyclical stocks. As a disruptive scenario, Horvitz points to "the questioning of the election results", especially by the current administration.

Conclusion

The U.S. midterms do not change the market’s driving forces, but they do redistribute its risks. A Democratic Congress reduces the likelihood of new fiscal stimulus, shifts the focus of policymaking to the White House’s executive powers, and concentrates scrutiny on healthcare, technology, energy, and banking. For professional investors, the lesson is to focus more on selection than direction: sector differentiation and monitoring energy prices and inflation matter. Jackson sums it up: the elections offer a clearer picture of Washington, but on their own, they do not determine the market outlook.