Post midterms: What’s next for policy, the economy, and financial markets?

With Democrats winning majorities in the House of Representatives and the Senate in the midterm elections, the U.S. is set for a period of divided government, with limited prospects for major legislative achievements over the next two years.

Let’s examine what the election results could mean for policy, the economy, and financial markets.

Divided government, marginal policy changes

Gil Fortgang
Washington Associate Analyst, T. Rowe Price Investment Management, Inc.

Divided government likely limits the legislative agenda to approving essential spending and gives Democrats bargaining leverage on these votes.

Marquee items on the docket include raising the debt ceiling, or the legal limit on the amount the government can borrow (likely late 2027), and yearly appropriations bills to allocate funding for federal agencies. Investors should also monitor the progress of the farm bill and reauthorization of transportation and infrastructure spending.

If past is precedent, investors should expect some political brinksmanship from both sides, especially on high‑profile votes such as the debt ceiling, with Democrats and the White House pushing their respective agendas before eventually reaching a compromise.

Moderating some of the planned cuts to Medicaid and food assistance programs are likely to be priorities for Democrats. Success on these fronts could be a tailwind for lower‑income consumers as well as hospitals and health insurers exposed to Medicaid.

Lowering drug prices could emerge as a bipartisan issue to watch during debt ceiling negotiations. However, the two sides differ on the approach: The Trump administration appears to prefer doing deals with companies, as opposed to legislated price controls.

Divided government also changes the complexion of the appropriations process by forcing any defense funding increases to occur on a bipartisan basis and potentially upping the budget for the National Institutes of Health (NIH). This scenario could shift defense budget growth to a lower and less lumpy trajectory. Whether life science tools companies would benefit from stepped‑up NIH funding will depend on whether and how the allocated money is spent.

AI and data centers emerged as major political footballs in this midterm election. Nevertheless, the Trump administration’s appetite for federal regulations is likely to be limited. State‑level restrictions could have implications for specific power companies and engineering and construction firms. However, data center projects will likely shift to friendlier states.

Midterm election results may have shifted the balance of power, but they are unlikely to drive a major change in policy direction over the next two years. Many of the Trump administration’s priorities around trade, geopolitics, and deregulation have been pursued via executive action. We expect that to continue.

Looking further out, Democrats’ strong performance in the midterms could shape the distribution of policy outcomes in 2029 to include the possibility of signature legislation that advances the party’s priorities. This risk bears watching, with the caveats that a lot can change in the interim and that redistricting at the state level could be a challenge.

Economy: Bigger forces at play

Blerina Uruçi
Chief U.S. Economist 

The outcome of the U.S. midterm elections is unlikely to materially alter the economic outlook. Instead, the key drivers of growth in 2027 are likely to be the energy shock, the Federal Reserve’s response to inflation risks, and investment in AI—all of which are largely outside Congress’s control.

The U.S. economy has demonstrated resilience in 2026, although growth has been driven by a relatively narrow set of factors. AI‑related investment remains a key engine of economic growth, a trend we expect to continue in 2027. However, higher oil prices and the Federal Reserve’s tightening cycle could put pressure on real incomes, particularly for lower‑ and middle‑income households, potentially slowing consumption growth.

On the fiscal front, the deficit is expected to remain elevated at around 5.7% of gross domestic product (GDP) in 2027¹. The election outcome is likely to have a greater impact on the composition and timing of fiscal policy than on the overall size of the deficit. While divided government could lead to marginally greater fiscal restraint, the risk of political brinkmanship around funding deadlines and the debt ceiling increases substantially, as does policy uncertainty.

Several key developments warrant attention going forward, starting with the December 11 expiration of the current continuing resolution—a temporary measure passed by Congress to keep the federal government operations funded. Another is the $41.1 trillion debt ceiling, which is expected to be reached around mid‑2027, with the so‑called X‑date—when the U.S. Treasury may exhaust its available cash and extraordinary measures—potentially falling in late 2027 or early 2028.

On inflation, the return to the Fed’s 2% target is likely to remain slow. At present, commodity prices pose an upside risk to prices. While the labor market has not been a significant source of inflationary pressure for the Fed this year, it’s unlikely to help bring inflation down either. Tighter immigration lowers the number of new jobs needed to keep unemployment stable, meaning that even slow job gains may not significantly weaken the labor market. Against this backdrop, the Fed is expected to continue raising interest rates in 2027. However, two key risks could alter this outlook: a rapid de‑escalation of the U.S.‑Iran conflict, which could ease inflationary pressures, and a sharper‑than‑expected economic slowdown triggered by higher interest rates.

Markets: Limited impact, but sector risks remain

Tim Murray, CFA
Capital Markets Strategist

The 2026 midterms may have greater political than market implications, as the government moves from full Republican control to divided government. Markets have largely anticipated this outcome for much of 2026, suggesting the immediate impact could be muted.

A more constrained presidency could provide some support for the U.S. dollar by reducing policy uncertainty. However, much of this adjustment may already be reflected in markets.

For Treasuries, divided government does not necessarily mean greater fiscal discipline. Much of the fiscal stimulus from the One Big Beautiful Bill Act is already in place, while persistent deficits and continued issuance could keep upward pressure on yields. Meanwhile, AI‑related investment is increasing demand for capital as hyperscalers and other companies turn increasingly to borrowing to finance expansion. Divided government could also mean less pressure on the Federal Reserve, reducing the risk of an excessively dovish policy stance.

Equities may see less of the traditional post midterm boost, given that much of the political uncertainty has already been priced in. More meaningful implications could emerge at the sector level. AI and data centers may face greater bipartisan scrutiny, potentially weighing on sentiment and delaying some projects, even without significant new legislation. Financials, meanwhile, could see their deregulation tailwind fade as divided government creates friction around further policy changes. For housing and construction, the market remains effectively frozen by the mismatch between prevailing mortgage rates and the lower rates held by existing homeowners, a problem that legislation alone may struggle to resolve.

Ultimately, the midterms may do little to alter the forces already shaping markets. For investors, persistent fiscal pressures, growing competition for capital, and sector‑specific policy developments could matter more than the election result itself.