According to Zhitong Finance APP, Blerina Uruci, Chief U.S. Economist at T. Rowe Price, and Tim Murray, Capital Markets Strategist in the Multi-Asset Division, shared their views on the potential impact of the U.S. midterm election results on the U.S. economy and financial markets.
Uruci noted that the U.S. midterm election results are not expected to significantly alter the economic outlook. Looking ahead to 2027, the main factors affecting U.S. economic growth will be energy price shocks, how the Federal Reserve responds to inflation risks, and AI-related investment. Most of these factors are not directly controlled by Congress.
The U.S. economy has shown resilience in 2026, but growth drivers remain relatively concentrated. AI-related investment continues to be an important engine driving economic growth, and this trend is expected to continue into 2027. However, rising oil prices and continued Federal Reserve rate hikes could put pressure on household real incomes, especially for low- and middle-income families, potentially slowing consumption growth.
On the fiscal side, the U.S. fiscal deficit is expected to remain at a high level of approximately 5.7% of GDP in 2027. The election results may have a greater impact on the specific measures and timing of fiscal policy than on the overall deficit size. While divided control of the executive and legislative branches may lead to somewhat more cautious fiscal policy, the risk of political battles over government funding deadlines and the debt ceiling will also increase substantially, raising policy uncertainty.
Several important developments are worth watching. First, the temporary funding bill passed by Congress to keep the federal government operating will expire on December 11. Second, the current U.S. debt ceiling of $41.1 trillion is expected to be reached around mid-2027. As for the so-called X-date, when the U.S. Treasury may exhaust its available cash and extraordinary measures, it could fall in late 2027 or early 2028.
On inflation, the process of U.S. inflation returning to the Federal Reserve's 2% target is expected to remain slow. Rising commodity prices are currently one of the main risks for further inflation acceleration. Although the labor market has not put significant pressure on inflation this year, it is also unlikely to be the main factor driving inflation down. Tighter immigration policy has slowed the growth of labor supply, meaning the number of new jobs needed to keep the unemployment rate stable has also decreased. Therefore, even with slow employment growth, the labor market may not necessarily weaken significantly. Against this backdrop, the Federal Reserve is expected to continue raising rates in 2027. However, two major risks could alter this forecast: first, a rapid de-escalation of the U.S.-Iran conflict, which would help ease inflation pressure; second, rate hikes causing a greater-than-expected economic slowdown.
Tim Murray noted that the political impact of the 2026 U.S. midterm elections may be more significant than the impact on financial markets. With Republicans losing full control, the U.S. will enter a period of divided government. Since the market had anticipated this outcome for most of 2026, the immediate market impact of the election may be relatively limited. More checks on presidential power may help reduce policy uncertainty, thereby providing some support for the dollar. However, the market may have already largely priced in this change.
On U.S. Treasuries, divided government does not necessarily mean improved fiscal discipline. Most of the fiscal stimulus from the One Big Beautiful Bill Act has already been implemented, and persistently high fiscal deficits and Treasury issuance may continue to put upward pressure on Treasury yields. At the same time, AI-related investment is driving up demand for capital, with hyperscale cloud service providers and other companies increasingly relying on borrowing to finance business expansion. Additionally, divided government may also reduce political pressure on the Federal Reserve, lowering the risk of excessively loose monetary policy.
On stocks, since the market has largely digested political uncertainty, the stock market rally that traditionally follows midterm elections may be more limited this time. Compared with the overall market, the election results may have more notable implications for individual sectors. AI and data centers may face stricter scrutiny from both Democrats and Republicans, which could affect market sentiment and delay the progress of some projects even without major new legislation. In the financial sector, as divided government creates resistance to further regulatory easing, the support previously provided by deregulation may weaken. As for real estate and construction, the notable gap between current mortgage rates and the lower mortgage rates enjoyed by existing homeowners has removed incentives for owners to sell and trade up, leaving the housing market in a near-stalled state that legislative measures alone are unlikely to resolve.
Overall, the midterm elections may not significantly change the main factors currently driving financial markets. For investors, persistent fiscal pressure, increasingly intense competition for capital, and policy changes in individual sectors may be more worthy of attention than the election results themselves.
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