On the evening of November 3 US Eastern Time, a US election data analysis firm released a projection stating that Democrats will retake control of the US Senate. Earlier, the same firm had projected that Democrats would retake control of the House of Representatives. This means that after the midterm elections, Democrats will regain control of Congress. According to projections from Decision Desk HQ, Democrats are expected to secure 51 of the Senate's 100 seats. According to the firm's earlier forecast, Democrats were expected to defeat Republicans in North Carolina, South Carolina, Texas, and Kansas to win Senate seats in those four key states. Some analysts believe that if Democrats win across the board, US stocks could fall more than 10%, the dollar could weaken, and international stocks could outperform the US market.
The core market concern is that once Democrats control Congress, they will impose stricter scrutiny on the tech industry and data center construction. Candidates from both parties have already made data centers an election issue, further intensifying existing market doubts about the scale and returns of AI spending. Chris Weston, head of research at Pepperstone, noted: "The 'blue wave' may have been partly priced in, but its scale forces the market to reassess risk. Currently, stocks carry the largest political uncertainty burden, and tech and AI are at the center of the adjustment."
But economist James Foord holds a different view. He pointed out that a sweeping Democratic victory in the midterms would indeed change some things, but in practical terms, the White House has the ability to severely limit what Congress can do. In fact, if one looks back at historical performance under this specific political configuration, the results are better than most investors imagine. James Foord focuses on the broader market outlook, not just the next few months, specifically analyzing what changes will occur in the market landscape after the election ends, results are announced, and winners and losers are determined.
No Override Power to Suppress It: Limited Impact From a Sweeping Democratic Victory
In 2020, when Democrats won the White House and controlled both chambers of Congress, the market quickly began pricing in expectations of tax increases and higher fiscal spending. But the situation now is different. US President Trump has veto power and has already said he will use it. On the 3rd, Trump told the media that he is "absolutely willing to accept the election results and is prepared to work with Democrats, and something may be reached." But Trump also said that if Democrats make progress in this election and win control of Congress, he may use the presidential veto to force Democrats to reach a bipartisan agreement with him.
To override a presidential veto, both chambers of Congress must pass the relevant bill by a two-thirds majority. Even with a sweeping Democratic victory, it is unlikely they will gain such a large advantage. More importantly, a sweeping Democratic victory would limit this administration's room to govern and make policy more prone to gridlock. In practical terms, corporate tax rates, tariff policy, and the deregulatory agenda would all remain unchanged. However, a Democratic-controlled Congress can block bills, conduct investigations, and hold hearings. If Democrats control the Senate, it will also affect the confirmation environment for judges, regulatory officials, and senior government officials. This is a political landscape worth watching, but it may not have much impact on the S&P 500 Index.
What Historical Data Says About This Specific Political Configuration
Historically, in the year after midterm elections, US stocks almost always rise. But investors need to further break down this statistic by the outcome of the midterms to gain deeper insight. Birinyi Associates tracked data from 1962 to 2006 and found that when a Republican president faced a Democratic-controlled House and Senate, the S&P 500's average return was 13.9%. By comparison, when Republicans fully controlled the White House and Congress, the S&P 500's average return across three relevant periods was only 3.3%. Therefore, in reality, a sweeping Democratic victory would put investors into a political configuration that has historically been more favorable for stocks.
Still, investors should not rely too heavily on these data, because the sample size is small and the periods are relatively distant. A more accurate comparison here should be midterm elections held during a president's second term, with the opposition party ultimately winning both chambers of Congress. Such cases include 1986 under Reagan, 2006 under George W. Bush, and the reverse-direction case in 2014 under Obama. According to Yardeni Research, in the 12 months after those three elections, the S&P 500 rose 1.1%, 6.7%, and 4.5%, respectively. All three were positive, but all were below the roughly 15% average post-midterm gain in the same data set since 1950.
The Real Risk Lies in the Fiscal Calendar
Political gridlock is usually seen as fiscal restraint, which should benefit the bond market, but investors can also argue from another angle that political gridlock may be bad for controlling the fiscal deficit. Specifically, it will change the dynamics of debt ceiling negotiations. Those negotiations are expected to begin around mid-to-late summer 2027, and this time the political gridlock could be more severe than ever before. If Democrats control the Senate, their leverage in negotiations will increase substantially. Schroders estimates that a last-minute compromise between the two sides could expand the fiscal deficit by about 1% of GDP. This is where this election connects to the bond market.
Schroders believes divided Congress could trigger a two-stage market reaction. First, as investors begin to price in expectations of weaker near-term fiscal expansion, bond yields will fall; then, as debt ceiling negotiations approach and market attention turns to the price required to reach a deal, yields will rise again.
Sector Performance Diverges, Rather Than the Index Moving in One Direction
Who controls Washington matters, but the real opportunities for excess returns come more from specific stocks and sectors than from the index itself. Saxo Bank cited research showing that in past years when Democrats won a sweeping victory, financials and healthcare were historically the worst-performing sectors. However, in those cases of sweeping Democratic victories, the White House was also controlled by Democrats. Still, James Foord believes investors can expect stricter scrutiny of these two sectors, especially healthcare, where drug pricing has long been a major issue.
As for AI, data center construction has already become an issue of bipartisan concern. This shows that no matter who wins the election, the challenges facing the AI industry will not disappear. James Foord cited JPMorgan analysis noting that in the currently most likely "Blue Wave" scenario, the S&P 500's trading range would be between a decline of 0.25% and a gain of 0.50%. The logic is as stated earlier: Trump will not sign a bill restricting AI development, and Democrats do not have enough seats to override a presidential veto.
Ultimately, this means market pullbacks remain buying opportunities. For the market, the best but least likely scenario is Republicans continuing to control both chambers of Congress. JPMorgan expects that under this scenario, the S&P 500 would rise 1.00% to 1.25%. However, this is also the scenario in which JPMorgan expects long-term Treasury yields to rise, because deficit spending will continue to remain at a high level.
James Foord concluded that a sweeping Democratic victory may sound alarming, but historical experience shows things may not turn out that way. Ultimately, it will create political gridlock, which may actually mean lower policy volatility, at least until debt ceiling negotiations arrive. At the same time, after the recent selloff, the S&P 500, especially the Nasdaq, now looks attractive. Likewise, long-term bonds may have already bottomed.
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