The Zhitong Finance App learned that on the evening of November 3 EST, the US election data analysis agency released predictive analysis stating that the Democratic Party will take back control of the US Senate. Earlier, the agency had predicted that the Democratic Party would take back control of the House of Representatives. This means that after this midterm election, the Democratic Party regains control of the National Assembly. According to forecast information issued by the US election data analysis agency Decision Desk Headquarters (DDHQ), the US Democratic Party will win 51 of the 100 seats in the U.S. Senate. According to the agency's earlier predictions, the Democratic Party is expected to defeat the Republican Party in North Carolina, South Carolina, Texas, and Kansas to gain Senate seats in these four key states.
Some analysts believe that if the Democratic Party wins overall, the US stock market may fall by more than 10%, the US dollar weakens, and the international stock market is expected to outperform the US market. The core of market concerns is that after the Democratic Party takes control of the National Assembly, the technology industry and data center construction facilities will be scrutinized more strictly. Candidates from both parties have listed data centers as an election topic, further fueling the market's existing doubts about the scale and return of AI spending.
Chris Weston, head of research at Pepperstone, said: “The 'blue wave' may have been partially anticipated, but its scale has forced the market to reassess risk. Currently, the stock market bears the greatest burden of political uncertainty, and technology and AI are at the center of adjustment.”
But economist James Foord has a different opinion. He pointed out that the Democratic Party's overall victory in the midterm elections will indeed change some things, but judging from the actual situation, the White House is capable of seriously limiting the actions Congress can take. In fact, if you look back at historical performance under this particular political landscape, you'll find that the results are better than most investors thought.
James Foord focuses on the broader market outlook, not just the trend over the next few months. He specifically analyzes how the market pattern will change after the election is over, the results are revealed, and the winners and losers are determined.
There is no veto suppression, and the impact of the Democratic Party's overall victory in the election is limited
In 2020, when the Democratic Party won the White House and controlled both houses of Congress at the same time, the market quickly began to take into account expectations of higher taxes and increased fiscal spending. But today's situation is different. US President Trump has veto power and has indicated that he will use this power.
Trump told the media on the 3rd, “I am definitely willing to accept the election results and prepare to cooperate with the Democratic Party, and maybe reach something.” However, Trump also said that if the Democratic Party makes progress in this election and gains control of Congress, he may force the Democratic Party to reach a cross-party agreement with it by exercising the presidential veto power.
To overturn the president's veto, both houses of the National Assembly need to pass the relevant bill by a two-thirds majority. Even if the Democratic Party wins the election outright, it is unlikely that it will have such a big advantage.
More importantly, the Democratic Party's overall victory will limit the current administration's administrative space and make it easier for policies to fall into an impasse. Judging from the actual situation, corporate tax rates, tariff policies, and the deregulation agenda will remain unchanged.
However, the Democrat-controlled Congress can block the passage of the bill, carry out investigations, and hold hearings. If the Democratic Party controls the Senate, it will also affect the environment for confirming the appointments of judges, regulators, and senior government officials. This is a political pattern worth watching, but it may not necessarily have much impact on the S&P 500 index.
How do historical data view this particular political landscape?
Historically, the US stock market has almost always risen in the second year after the midterm elections. Investors, however, need to further split this statistic according to the midterm election results to gain a deeper insight.
Birinyi Associates tracked data from 1962 to 2006 and found that when Republican presidents faced the Democrat-controlled House of Representatives and Senate, the average return on the S&P 500 index was 13.9%. In contrast, with the Republican Party in full control of the White House and Congress, the average return for the S&P 500 over the three relevant periods was only 3.3%.
Therefore, in reality, the Democratic Party's overall victory will allow investors to enter a political pattern that is more favorable to the stock market in terms of historical performance. However, investors should not rely too much on this data, as the sample size is small and the time period is relatively long.
Here, a more accurate comparison should be the midterm elections held during the second term of the president, and the opposition party eventually won both houses of the National Assembly at the same time. Examples include: Reagan's administration in 1986, George W. Bush's administration in 2006, and Obama's administration in the opposite direction in 2014. According to data from Yardeni Research, the S&P 500 index rose 1.1%, 6.7%, and 4.5%, respectively, in the 12 months after the end of the above three elections. All three results were positive, but all were below the agency's average increase of about 15% in the stock market after all midterm elections since 1950 in the same data set.
The real risk lies in the fiscal schedule
The political impasse is generally viewed as a fiscal constraint, which should benefit the bond market, but investors can also view from another perspective that the political impasse may not be conducive to controlling the fiscal deficit.
Specifically, it will change the pattern of debt-ceiling negotiations. The relevant negotiations are expected to begin around mid-summer 2027, and this time the political impasse is likely to be worse than any before. If the Democratic Party takes control of the Senate, its bargaining chips will increase dramatically. Schroeder estimates that if the two sides reach a compromise at the last minute, the fiscal deficit may widen to about 1% of GDP. This is where this election is linked to the bond market.
Schroeder believes that a split in Congress may trigger a two-stage market reaction. First, bond yields will decline as investors begin to take into account expectations of the recent weakening of fiscal expansion; then, as debt ceiling negotiations approach, market attention shifts to the costs required to reach an agreement, and yields will rise again.
Industry performance is fragmented rather than the overall direction of the index
Who is in charge of Washington, and the opportunities that can actually bring in excess returns come more from specific stocks and industries than from the stock index itself. Saxo Bank quoted research as pointing out that in the past year when the Democratic Party won overall, the financial and healthcare sectors have historically been the worst performing industries. However, in these cases where the Democratic Party completely won the election, the White House is also controlled by the Democratic Party.
Despite this, James Foord believes investors can still expect these two industries to face more stringent scrutiny, particularly in the healthcare sector, where drug pricing has always been a major issue. As for AI, data center construction has become a topic of common concern for both parties. This shows that no matter who wins the election, the challenges facing the AI industry will not go away.
James Foord quoted J.P. Morgan's analysis as pointing out that for the most likely “blue wave” (blue wave, Democratic Party overall victory) scenario, the S&P 500 index will fluctuate between a 0.25% drop and a 0.50% increase. The logic is as described above: Trump will not sign a bill restricting the development of AI, and the Democratic Party does not have a sufficient majority to overthrow the presidential veto power. At the end of the day, this means that the market pullback is still a buying opportunity.
For the market, the best but least likely scenario would be for the Republican Party to continue to control both houses of Congress. J.P. Morgan expects the S&P 500 index to rise 1.00% to 1.25% under this scenario. However, this is also a scenario where J.P. Morgan Chase expects long-term treasury bond yields to rise, as fiscal deficit spending will continue to remain at a high level.
James Foord concluded that the Democratic Party's overall victory might sound worrying, but historical experience shows that this is not necessarily the case. Ultimately, this will result in a political impasse, which may actually mean less policy volatility, at least until debt-ceiling negotiations arrive. Meanwhile, after a recent sell-off, the S&P 500 index, particularly the Nasdaq index, now looks attractive. Similarly, long-term bonds may have bottomed out.