Prediction markets indicate that the probability of Democrats sweeping both chambers of Congress in the midterm elections is approaching two-thirds — precisely the election outcome that Wall Street's forecasting models deem least favorable for US equities.
JPMorgan, citing prediction market data, noted that as of November 1, the probability of Democrats capturing both the House and the Senate stood at 66%. In JPMorgan's scenario forecasts, the "blue wave" — a decisive Democratic victory — is the only scenario that encompasses the possibility of index declines. All other outcomes — whether Democrats take only the House, Republicans hold both chambers, or a divided Congress emerges — point to stock market gains.
For the AI sector, the impact of a Democratic sweep of Congress is particularly direct. Goldman Sachs expects that a Democrat-controlled Congress would launch investigations into large technology companies regarding AI development, safety practices, and data collection, and would push to exclude data centers from bonus depreciation, R&D tax credits, and other tax incentives. It could even propose a federal excise tax targeting data center electricity consumption. JPMorgan characterized this as "investigation risk" facing business leaders associated with Trump donations, with tech giants among them.
Blue Wave: The Only Scenario That Weighs on Stocks
The probability of a Democratic sweep of both chambers has been climbing steadily over recent months. According to JPMorgan, the probability stood at 62% in early October, with a divided Congress at 29%. By the eve of the election, a divided Congress had fallen to 26%, Republicans holding both chambers had dwindled to just 7%, and the rare combination of a Republican House with a Democratic Senate had dropped to as low as 1%.
JPMorgan's scenario forecasts show that if Democrats take only the House, the S&P 500 is expected to rise 0.5% to 1%; if Republicans hold both chambers, gains are projected at 1% to 1.25%; and if the unusual combination of a Republican House and Democratic Senate materializes, the increase would be roughly 0.25% to 0.75%. Only in the blue wave scenario does the bank's projected range include downside potential.
Goldman Sachs analysts Alec Phillips and Abhay Duggirala reached similar conclusions on the regulatory outlook. They expect any bipartisan AI agreement would center on voluntary testing and self-regulation, placing limited burdens on AI companies, and that a nationwide moratorium on data center construction is unlikely under any election outcome. However, if Democrats control Congress, the regulatory and investigative agenda would accelerate markedly.
AI Regulation: The Core Target of the Democratic Agenda
JPMorgan believes that if Democrats sweep both chambers, they will undoubtedly push forward AI regulatory legislation — though actual enactment would be difficult, since Trump has made clear he will not sign any bill restricting AI expansion, and Democrats cannot muster the majorities needed in both chambers to override a veto. Trump previously told media that under a stalemate, "I veto everything."
JPMorgan noted that for investors bullish on AI, a post-election stock decline could present a buying opportunity, but the risk is that the market uses the moment to significantly reduce exposure within the AI theme.
Goldman Sachs, meanwhile, expects a Democratic Congress could also apply fiscal pressure: restoring spending cuts from last year's fiscal package would add approximately $85 billion in spending in 2027, including about $55 billion for Medicaid and roughly $18 billion for nutrition programs; restoring expanded Affordable Care Act subsidies would add approximately $50 billion more annually.
House Minority Leader Hakeem Jeffries is expected to move quickly on expanding healthcare subsidies, rolling back tariffs, and holding votes on the Iran war issue, according to Goldman Sachs.
Tariffs: Rates Will Rise Regardless of Who Wins
Goldman Sachs warned that even if Democrats attempt to dismantle some tariffs — most likely targeting Canadian imports — the practical effect would be limited.
After the election, Goldman Sachs expects Trump to release the results of a Section 301 investigation into industrial overcapacity, which, combined with existing forced labor tariffs of 10% to 12.5%, would essentially restore tariff rates on various trading partners to levels before the Supreme Court ruled IEEPA tariffs unconstitutional. Goldman Sachs estimates that the US effective tariff rate would rise by nearly 2 percentage points as a result.
This means that regardless of the midterm election outcome, the cost pressures from trade friction will not dissipate with a change in political power, and uncertainties facing corporate supply chains and profit margins will persist.
Iran: A Post-Election Variable for Military Risk
On the geopolitical dimension, the election outcome has a substantive impact on the trajectory of the Iran situation.
JPMorgan believes a Republican sweep would likely encourage Trump to maintain pressure on Iran until reaching an agreement he considers favorable to the US, or until Iran compromises. If Democrats control Congress, they could cut related military funding or invoke the War Powers Act to demand a withdrawal — but action could only be taken after the new Congress is seated in January.
JPMorgan energy expert Brendan Henrici noted that the 2027 WTI crude fair value swap is currently trading near $88, while the normal price range is $65 to $70. This means the oil hedging space available to equity investors has narrowed substantially, and JPMorgan suggests that moderately increasing downside protection "may be prudent." Goldman Sachs has just raised its Brent crude forecast to reflect supply disruption risks.
Polls and Early Voting: The Senate Remains in Doubt
Goldman Sachs interprets prediction markets as giving Democrats a greater than 90% win probability in the House and above 65% in the Senate, noting that the national political environment has swung 10 to 11 percentage points toward Democrats compared to 2024, with markets implying approximately 236 Democratic House seats. The Senate outcome is harder to judge.
Goldman Sachs data shows that since 2002, Republican Senate candidates in Republican-leaning states have outperformed final polls by an average of 3 percentage points; in competitive races, candidates leading by less than 2.5 percentage points have ultimately won only about 60% of the time. Among Republican incumbent Senate seats, only North Carolina has a Democratic lead exceeding a 3-percentage-point buffer.
As of last Wednesday, more than 43 million Americans had already cast early votes, nearly 10 million more than at the same point in 2022, with Texas early voting up 50% and South Carolina up 83%. In states that publish party registration data, Democrats cast approximately 6.8 million ballots versus about 5.2 million for Republicans. However, JPMorgan noted that early voting has historically favored Democrats, while Election Day voting has favored Republicans.
The two banks also differ in their assessment of voter concerns. JPMorgan, citing recent CNBC and Fox News polls, indicated that corruption has surpassed cost of living as the primary voting motivation. Goldman Sachs' Harris Poll data shows cost of living remains far ahead, with government corruption second, and only 2% of voters listing AI as their top issue.
Historical Seasonality: Over the Long Term, Post-Election Bull Markets Are Well Documented
Beyond short-term uncertainty, historical data provides a longer-term reference point for the market. JPMorgan's Craig Cohen noted that since 1950, the S&P 500 has risen in the year following every midterm election, with an average gain of approximately 15%. The worst performance came after the 1986 midterm elections, but as he put it, "that clearly had more to do with the 1987 market crash than with political developments in Washington."
More specific data shows that the S&P 500 has averaged gains of 5.4% three months after midterm elections, 11.4% at six months, 12.5% at nine months, and 14.7% at twelve months. Since 1990, six-month, nine-month, and twelve-month returns have each been positive every time. On the positioning front, JPMorgan's Delta One team said its "divided Congress" pair trade portfolio has climbed to a two-year high.
Goldman Sachs added that if Democrats win the Senate, Trump will face pressure to complete personnel appointments quickly in order to secure confirmation with a Republican majority before year-end. A Democratic-controlled Senate could block his nominees, and while Trump can install acting officials at cabinet agencies such as the Treasury, he cannot do the same at the Federal Reserve or in the court system.
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