U.S. midterm elections: What investors need to know

Although the U.S. midterms tend to attract less attention than presidential elections, they can still matter for markets and investors. This November’s contests will provide insight into artificial intelligence (AI) as a policy issue and shape the political landscape in important ways for the 2028 presidential election.

From election results to policy: What changes in Washington?

Gil Fortgang
Washington Associate Analyst

If Democrats were to win control of the Senate and/or the House of Representatives, the Trump administration’s ability to pass major legislation would be constrained by the need for bipartisan agreement.

In this scenario, legislation would likely be restricted to necessary items, such as budgets and extending the farm bill and surface transportation programs. Divided government could delay approval and favor short-term agreements while potentially shaping the complexion and magnitude of any funding increases (Figure 1).

Fiscal negotiations could also become more contentious under a divided government, particularly around the debt ceiling—the legal limit on how much the U.S. government can borrow to meet existing negotiations. The current $41.1 trillion debt ceiling is expected to be reached sometime in 2027. Raising or suspending this limit requires congressional approval, and signs of prolonged negotiations could contribute to financial market volatility.

By contrast, if Republicans retain unified control of government, the administration would have greater scope to advance its agenda legislatively (Figure 1).

That said, the midterm results are unlikely to drive a major shift in policy direction. Many of the Trump administration’s priorities around trade, geopolitics, and deregulation have been pursued via executive action. We would expect that to continue regardless of the election outcome.

AI politics—a key issue to watch

The midterms have offered an early glimpse of what AI politics might look like.

Not only has the data center construction boom raised concerns about water use and electricity prices, but ambient worries about what AI could mean for society and employment are also in the air.

Most prominently, the governors of Texas and Pennsylvania, both of whom are up for reelection, announced executive actions regarding data center construction that were strongly worded but generally involved incremental restrictions on speculative projects. None of the measures announced by these two gubernatorial candidates are likely to halt legitimate projects.

So far, AI models have emerged as political targets for consumer safety issues. Specific projects and some utilities’ return on equity have also faced scrutiny. 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.

We are closely watching sentiment around data centers and AI as well as what stances politicians take and whether they are rewarded by voters. The midterm election could provide an early read on the political appetite for greater AI regulation in coming years and what form those policies might take at the national level.

What could the midterms tell us about 2028?

The midterms have also taken on increasing importance for the 2028 presidential election cycle. The Supreme Court’s April decision changed the interpretation of the Voting Rights Act, opening the door to challenges and potential changes in state congressional maps. These redistricting efforts could shift the balance of power in the House in future elections.

Against this backdrop, the number of Senate seats Republicans retain in the midterms will be important to watch. If they emerge with 51 or 52 seats, they may be well positioned to control the Senate in 2028. Combined with potential changes to the House map, this could have important implications for the policy landscape in 2029.

What could the midterm elections mean for markets?

Tim Murray, CFA
Capital Markets Strategist

Divided government could reduce the prospect of major policy changes and, in turn, political uncertainty for financial markets. This could benefit the U.S. dollar but weigh on precious metals, given the degree of political risk currently priced in. Fixed income could also receive some support at the margin. Political uncertainty has been one factor contributing to a higher term premium—the additional yield investors demand for holding longer term Treasury bonds rather than shorter term securities.

However, there are still reasons for longer-term Treasury yields to remain elevated. Inflation is likely to remain above target, while the fiscal deficit is expected to stay high. Large federal deficits will require significant ongoing Treasury issuance, potentially maintaining upward pressure on longer-term yields.

By contrast, a Republican clean sweep could weigh on the U.S. dollar. Fixed income may also come under pressure if such an outcome increased expectations for policies that could add to inflationary pressures.

For equities, the implications may depend not only on which party wins, but also on the composition of the incoming Congress. For example, a shift toward more progressive lawmakers, particularly if accompanied by increased support for wealth taxes and other redistributive policies, could raise concern among investors. A more moderate cohort, by contrast, could be viewed more favorably by equity markets.