Democrats are likely to sweep both chambers of Congress in the 2026 US midterm elections, which would substantially constrain Trump's policy room in his final two years. This shifting landscape will transmit to capital markets through three channels 鈥?fiscal, monetary, and industrial policy 鈥?and will have directional implications for major asset pricing.
According to the latest election assessments, polling from multiple institutions shows the probability of Democrats winning the House generally exceeds 90%, with Senate odds concentrated in the 64% to 79% range. Data from prediction markets Polymarket and Kalshi show an implied probability of roughly 70% that Democrats take both chambers, and about 26% to 27% that they win only the House. Guosen Securities treats a Democratic sweep as its base case, assigning it roughly a 60% probability.
Both institutions are highly aligned on the base-case scenario but diverge on how they read geopolitical risk: Guosen Securities believes de-escalation is more likely, which would help suppress inflation compensation; China Merchants Securities warns that after a midterm defeat, Trump could pivot to seeking breakthroughs in foreign affairs, meaning geopolitical risk could actually rise in the near term.
At the asset level, both institutions agree that US Treasuries and gold will receive marginal support, but stress this does not equate to the start of a one-way rally 鈥?real interest rate trends and the Fed's policy stance remain decisive variables. China Merchants Securities further notes that if Democrats take both chambers, crude oil is short-term bullish, copper and the AI supply chain face pressure, and policy expectations for the clean energy sector could improve markedly.
Democratic Sweep as Base Case, Republican Majority Advantage Fragile
Both institutions treat a simultaneous Democratic takeover of the House and Senate as the highest-probability base case.
Guosen Securities assigns this scenario roughly a 60% probability, primarily based on the historical "midterm curse" pattern 鈥?across 25 midterm elections in the past 100 years, the ruling party has lost an average of about 23.4 House seats and 4.3 Senate seats. Before this election, Republicans held only 219 House seats and 53 Senate seats, leaving both majorities relatively thin with limited buffer against seat losses.
China Merchants Securities cites the latest polling from eight institutions to further quantify this judgment: all eight predict a Democratic House win with probability above 90%, while seven place Democratic Senate odds in the 64% to 79% range. On prediction markets, Polymarket and Kalshi data show an implied probability of about 70% for Democrats winning both chambers, and roughly 26% to 27% for winning only the House.
Beyond congressional control, China Merchants Securities also outlines the core differences in the two chambers' powers: the House exclusively holds the power to originate tax revenue bills and leads the fiscal appropriations agenda; the Senate holds confirmation authority over key personnel appointments including cabinet members, Fed officials, and federal judges, as well as final review of major legislation. This means that losing both chambers would constrain Trump's governance far more severely than losing only the House.
Party Divisions Center on AI and Geopolitics, White House Faces Multiple Constraints
After Congress changes hands, partisan policy divisions will translate directly into constraints on White House governance. Both reports focus on the three areas where divisions are most pronounced.
On AI regulation, Republicans favor deregulation and accelerated investment, while Democrats focus more on AI compliance and the impact of data center expansion on residential energy costs. Democratic-governed states including New York, Pennsylvania, Virginia, and California have successively issued executive orders imposing stricter electricity, water, and environmental reviews on data centers, canceling some state-level subsidies, and requiring developers to bear new power and grid costs. If AI regulation tightens and slows big tech financing pace, competitive pressure from high-grade credit bonds on Treasury allocation funds will ease somewhat.
On fiscal policy, with Democrats controlling both chambers, resistance will rise markedly to new tax cuts and spending expansion beyond the existing arrangements in Trump's "Big Beautiful Bill." Guosen Securities cites historical data: after the 1994 midterms, the Clinton administration's fiscal deficit ratio fell from 2.8% to 2.2% and 1.4% in the following two years; after the 2006 midterms, the Bush administration's deficit ratio also fell from 1.8% to 1.1% the next year. If the parties split control of the two chambers, total fiscal spending may not contract significantly, but large-scale new tax cuts and welfare reductions would both be difficult to pass 鈥?more likely resulting in deficits staying elevated with funds directed more diffusely.
On geopolitical policy, Guosen Securities believes Democrats could use appropriations to constrain certain overseas actions, facilitating de-escalation and thereby lowering oil prices and inflation risk premiums, providing downward momentum for nominal Treasury yields. China Merchants Securities holds the opposite view 鈥?historical patterns show that after midterm defeats, presidents often shift policy focus to foreign affairs in pursuit of breakthroughs.
Monetary Policy Indirectly Constrained, Consumption and Investment Face Downward Pressure
The midterm impact on monetary policy is more indirect than on fiscal policy, primarily through the Fed governor appointment process.
Guosen Securities details this transmission mechanism: Fed governors are nominated by the president and must be reviewed by the Senate Banking Committee before going to a full vote. The committee currently has 24 members, of whom 8 correspond to seats up for re-election in 2026. If Democrats win the Senate, they will be able to impose stronger constraints at the committee level on Trump's nominees. Powell's governor term expires on January 31, 2028, and confirmation of his successor could face greater resistance. This means Democratic presence in Congress would help safeguard the Fed's policy independence.
On the economic front, both institutions note three pressures facing the US economy after the midterms. First, advancing new fiscal stimulus becomes harder 鈥?while existing tax cut arrangements in the "Big Beautiful Bill" will continue, the marginal boost to consumption from tax refunds may gradually diminish. Second, AI investment is a key pillar of the US economy; if Democrats push for stricter compliance oversight and constrain data center expansion, slower project timelines will weaken the boost to construction, power, and energy investment. Third, on trade policy, the White House may find it harder to win legislative support for new tariffs.
Treasuries and Gold Get Marginal Support, But Rally Needs Multiple Conditions
On asset outlook, both institutions are largely aligned on Treasuries and gold: the midterms provide marginal tailwinds, but do not signal a one-way rally.
On Treasuries, Guosen Securities identifies three downward drivers: first, slower AI financing eases competition from credit bonds for long-term allocation funds; second, constrained fiscal expansion reduces bond supply pressure; third, improved geopolitics lowers inflation compensation. But Guosen Securities also cautions that maintaining elevated fiscal spending does not mean lower debt issuance 鈥?a debt ceiling standoff triggering repayment concerns could actually push some Treasury yields higher. Under a Democratic sweep scenario, Treasury futures are "range-bound with a bullish bias," while under a House-only loss scenario, they remain "range-bound."
On gold, Guosen Securities reviews 2026 trading themes and distills three patterns in gold pricing: real interest rates are the primary variable, and their rise tends to suppress gold prices; when real rates stabilize, changes in rate hike expectations more easily dominate short-term moves; liquidity stress can temporarily break these relationships as investors sell gold to obtain US dollar cash. Looking ahead, with Democrats in Congress, constrained fiscal expansion and slower AI financing demand should bring real rates down, lowering the opportunity cost of holding gold 鈥?but rate hike expectations remain high and liquidity pressure persists, so a rally still requires more supportive conditions.
China Merchants Securities' historical review provides quantitative reference: in the past five cases where the president's party lost midterms, if both chambers were lost, gold gained 11% in the six months after the 2006 midterms and 2% after 1994; if the Senate was retained, gold gained 21%, 4%, and 14% in the six months following 2022, 2018, and 2010 respectively.
At the sector level, China Merchants Securities believes that if Democrats sweep both chambers, policy expectations for new energy and energy storage sectors will improve markedly 鈥?Senate Democratic Leader Schumer has publicly stated that if Democrats regain the Senate majority, they will prioritize restoring clean energy tax credits under the Inflation Reduction Act. Copper and the AI supply chain face short-term pressure, tech stocks come under strain, crude oil is short-term bullish, and the dollar remains range-bound. If Republicans successfully hold both chambers, these judgments would reverse directionally, with the AI supply chain and copper relatively favored, gold and crude oil weaker, and the dollar range-bound with an upward bias.
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