On November 3, the U.S. midterm elections held their official vote, and preliminary results indicate that a Democratic sweep is essentially a done deal.
According to data from Polymarket, Kalshi and others, Democrats are expected to ultimately secure 260 House seats (218 being the majority) and 56 Senate seats (51 being the majority).
The prolonged standoff over the Iran situation and rising inflation have worn down many voters' patience, and Trump's approval rating had been sliding well before the midterms, with inflation being the issue on which his approval was lowest.
The advantage Democrats achieved clearly exceeded expectations, especially with some deep-red states like Texas flipping blue, which caught many off guard.
This outcome briefly sparked market worries about Trump's policy agenda being blocked, increased political brinkmanship, and tighter regulation of AI and cryptocurrencies. As a result, Nasdaq futures fell as much as 2%, while cryptocurrencies and the dollar also weakened.
But sentiment soon recovered markedly, and the market shifted to trading the idea that a Democratic Congress would restrain Trump's "mistakes" on certain policies.
Given the great uncertainty surrounding both the direction and pace of policy advancement, the market's opposite reactions on both sides seem to have justification.
In fact, different midterm issues can have completely opposite effects on the same asset.
In our view, the essence of the impact on assets lies in determining whether the dominant force is a system of checks and balances aimed at correcting existing errors (inflation, the Iran situation, the Federal Reserve, tariffs), or mainly "meddling" that opposes for the sake of opposition (AI, fiscal policy).
So what did this midterm change? Which policy directions are more likely to advance? And what does it mean for assets?
How do midterm elections affect policy? Increased political brinkmanship, more fiscal constraints, and AI facing regulatory constraints
To understand the actual impact of the midterms, one must first understand the boundaries and operating mechanisms of U.S. congressional and presidential power. Simply put, controlling both chambers of Congress does not mean one can "do whatever one wants," as there are still considerable checks and balances and procedural limits, which means the final results will be concentrated in a few areas.
The Senate and House have different areas of authority; broadly speaking, the House "controls the money" (budget, tax and other issues), while the Senate "controls the people" (confirming presidential nominations). On foreign affairs and trade, Congress has limited say.
But the Senate also has a "special power" called the filibuster, through which the minority party can turn the legislative process into an endless affair with extremely long speeches, effectively blocking a bill's passage.
So if one party controls only a simple Senate majority, such as 51 seats, it will still struggle on many important bills. Otherwise, why is it that Republicans currently hold both chambers, yet the fiscal 2027 budget (which already began in October) still cannot pass?
But controlling 60 seats is different: a 60-seat supermajority can vote to end a filibuster. So 60 votes is an important "dividing line." Aside from fiscal budget-related bills that can pass with a simple majority through the reconciliation process, ordinary bills generally need 60 votes to pass.
In addition, the president also has a power called the veto, which will also make Democratic agendas very difficult to realize.
Combining the midterm results with the operating mechanisms of congressional power, several points are relatively clear: 1) Trump and his supporters may face investigative pressure. After the 2019 midterms, Democrats pushed to impeach Trump, though it was only symbolic (conviction requires a two-thirds absolute majority in the Senate). 2) Fiscal brinkmanship will intensify. Implementing fiscal 2027 in the direction Trump envisions will be very difficult, such as military actions being affected; but places where Democrats want to spend can also be vetoed by Trump. During this tug-of-war, government shutdowns will increase (though with basically no substantive impact), and debt ceiling risk will rise (currently estimated to be hit in Q2 2027), but the debt ceiling is so important that no one can afford a default, so it will most likely remain "risky but safe." 3) AI regulation will mainly depend on local governments, and federal-level legislation will be very difficult.
Although the overall direction is like this, the actual outcome depends on the results of partisan bargaining and the speed of implementation, and remains uncertain.
Fiscal policy: Brinkmanship intensifies, fiscal expansion becomes difficult; government shutdowns and debt ceiling disturbances increase
Congress controls America's "purse strings," making it key to implementing fiscal policy and the core area of partisan bargaining. At present, the two parties have major differences on fiscal issues such as defense and healthcare.
Although Democrats controlling both chambers could in theory use the reconciliation process to bypass the filibuster that requires 60 votes to end, Trump's veto power can still greatly constrain the Democratic agenda, ultimately leading to greater fiscal brinkmanship and making final implementation very difficult.
Republicans: Fiscal resources tilt toward defense. In April 2026, Trump submitted the fiscal 2027 presidential budget, mainly to implement his proposals through annual appropriations and budget reconciliation. According to CBO estimates, Trump plans to increase spending by $117 billion in 2027, of which $98 billion goes to defense.
Democrats: End geopolitical conflicts and strengthen livelihood protections. Judging from the Democratic policy agenda, they advocate restoring healthcare protections (such as ACA and Medicaid), ending military action against Iran, repealing tariff policies, lowering living costs, and strengthening oversight of Trump, which clearly differs from the policy tendencies reflected in Trump's presidential budget and the "One Big Beautiful Bill."
Will the new Democratic-led Congress affect fiscal 2027? The period from the end of the midterms (November 3, 2026) to the seating of the next Congress (January 3, 2027) is called the "lame-duck session," during which the Senate and House are still controlled by Republicans. If Republicans can, during this period, push the main annual appropriations and new spending plans for fiscal 2027 through the legislative process (meaning passage by both chambers and signature by the president), then even if Democrats win a landslide in the midterms, the impact on fiscal 2027 will be limited.
But this Congress's legislative progress is lagging, and some fiscal disputes may need to be left to the new Congress to resolve.
Annual appropriations: As of before the midterms, only 3 of the 12 annual appropriations bills had passed a full House vote, and 0 had passed a full Senate vote, a pace significantly behind the previous three midterm election years.
Budget reconciliation process: Trump hopes to push a third round of budget reconciliation legislation (Reconciliation 3.0) to implement his fiscal demands. But reviewing the first two rounds of reconciliation, from passage of the budget resolution by both chambers to signature into law, the "One Big Beautiful Bill Act" (OBBBA) took 85 days, and the "Secure America Act" took 42 days. At present, even the budget resolution, which is a prerequisite step for Reconciliation 3.0, has not yet passed both chambers.
Note: The new defense funding scale in Reconciliation 3.0 is the scale proposed by the White House.
Because partisan bargaining over fiscal legislation will intensify markedly, we flag a rising probability of "government shutdown" and "debt ceiling" issues.
Government shutdown: A CR extension in December is likely, but the risk of a shutdown rises in the first half of next year. This Congress failed to pass annual appropriations bills before the start of fiscal 2027, and Trump signed a continuing resolution (CR) on September 2, extending existing funding arrangements to December 11. By then the new Congress will not yet be seated, and Republicans will still control both chambers, so passing a new round of CR is relatively likely. But if the new CR extends funding into the term of the new Congress (the average CR duration is 118 days), then as Democrats take control of Congress, partisan fiscal differences may widen further, and the risk of a government shutdown may erupt in the first half of next year.
Debt ceiling: We estimate the U.S. will hit the debt ceiling in Q2 2027, corresponding to reaching the X-date (the day funds run out) in Q4 2027. In July 2025, the "One Big Beautiful Bill" raised the debt ceiling by $5 trillion to $41.1 trillion ("U.S. Treasuries, U.S. Stocks and Liquidity After the 'One Big Beautiful Bill'"). As of October 28, constrained public debt reached $40.4 trillion, once again approaching the ceiling. If we assume the fiscal 2027 deficit ratio is broadly flat and that when the ceiling is reached, the TGA balance falls 25% from end-2026, then the U.S. will hit the ceiling in Q2 2027. According to BPC estimates, after hitting the ceiling it takes about 6-9 months for funds to run out, implying an X-date around Q4 2027.
With the two parties checking each other and fiscal implementation facing higher resistance, we expect the 2027 deficit ratio may be flat or expand slightly. Under a scenario of continuing current policies, we expect the U.S. deficit ratio to edge down from 6.18% in fiscal 2026 to 6.14% in fiscal 2027; if all new spending in the presidential budget is implemented, it could rise to 6.52%. Considering that defense spending accounts for a very large share of the presidential budget (CBO estimates the tilt in the 2027 budget reaches 84%), which clearly diverges from Democratic ideas, we believe fiscal policy is unlikely to be implemented exactly as Trump envisions. But Democrats are likewise constrained, ultimately causing fiscal 2027 to converge toward current policy.
Military: The new Congress constrains through limits on new military spending and investigations
Congress has limited direct constraints on the president in foreign affairs and the military. As commander-in-chief of the U.S. armed forces, the president enjoys considerable autonomy in commanding and executing military operations, while Congress mainly constrains through war authorizations and legislative restrictions. But in reality, the president can find ways to circumvent some congressional limits. In the conflict with Iran, the Trump administration argued that the April ceasefire meant hostilities had ended, so the 60-day deadline under the War Powers Resolution no longer applied, and recalculated the deadline after resuming military operations in July, thereby bypassing congressional opposition.
The new Congress can constrain Trump by limiting new military spending. Defense spending is a major demand in the fiscal 2027 presidential budget, with Trump seeking to raise defense funding by $251 billion through annual appropriations and arrange an additional $350 billion in defense funding through the reconciliation process. At present, both legislative procedures are progressing slowly and lag behind past midterm election years, and will likely need to be reviewed by the Democratic-led new Congress.
AI: Democrats also support AI, with the disagreement over the degree of regulation; federal-level legislation is difficult, but local governments may tighten regulation
AI contributes greatly to U.S. growth and corporate earnings, and Democrats also support AI development. In the second quarter, U.S. real GDP grew at a 2.2% annualized quarter-over-quarter rate, with broad AI demand (AI production investment and infrastructure) contributing 28% to U.S. growth, adding about 0.6ppt; in addition, AI-related sectors contributed 53% of U.S. stock market growth. Therefore, both parties have the will to promote AI innovation. In December 2025, House Democratic leader Jeffries said U.S. AI companies should continue to develop, and established an "AI and the Innovation Economy Commission" to study policy. In February 2026, Senate Democratic and Republican lawmakers jointly proposed the "Future AI Innovation Act," supporting AI R&D and America's technological leadership.
The main disagreement between the two parties lies in the intensity of AI regulation, and it is not easy for Democrats to pass a federal-level bill strengthening regulation. In the Trump administration's AI legislative framework, it advocates relying on existing regulators and industry standards for oversight, and opposes creating a new federal AI regulator. By contrast, Democrats focus more on strengthening regulation, with Senate Democratic lead member Cantwell proposing enforceable frontier-model safety standards and requiring covered models to pass independent audits before release. But even if Democrats sweep both chambers, pushing a regulatory bill is still difficult, because after passing both chambers a bill may still be vetoed by the president, and overriding a presidential veto requires support from two-thirds of voting members in each chamber.
At the local government level, however, candidates for governor in both parties generally lean toward tightening regulation of AI data centers. According to DC Byte data, the five states with the most concentrated AI data center deployment in the U.S. are Texas, Georgia, Virginia, Ohio and Pennsylvania. Among them, Virginia has no gubernatorial election this year, while candidates in the other four states all lean toward strengthening regulation of AI data centers, or even pausing construction. Judging from existing measures, local governments may constrain AI data center construction in areas such as electricity costs, tax incentives and land use.
How does a Democratic sweep affect assets? Watch four transmission channels: government shutdowns, the debt ceiling, fiscal policy and AI regulation
The same policy does not affect different assets in the same way, and short-term and long-term effects may also be opposite. For example, rising political brinkmanship will boost demand for safe havens; constrained fiscal expansion is generally positive for Treasuries, but rigid spending and default risk will pressure Treasuries and the dollar; blocked personnel appointments are instead conducive to maintaining Fed independence; although the direction of AI and crypto regulation is clear, the pace of implementation remains unclear; and an early end to military action is favorable for oil prices, inflation and interest rates to fall.
Ultimately, the core of the impact on asset pricing is: whether the market's dominant force is checks aimed at "correcting deviations" (inflation, the Iran situation, the Fed, tariffs), or interference oriented toward "opposing for the sake of opposing" (AI, fiscal policy). We lean toward believing that in the short term the former dominates, which is also why U.S. stocks mostly rose after the midterms; at that time U.S. stocks still had support, while Treasury yields and the dollar weakened slightly. But the risks brought by the latter may also rise over time, since the closer it gets to the 2028 election, the more intense political brinkmanship will become, especially if AI lacks breakthroughs and the Fed cannot cut rates. If so, U.S. stocks, Treasuries and the dollar will all face pressure.
Specifically:
Government shutdown: The market impact is limited, and it may boost safe-haven sentiment in stages. From historical experience, during the past 21 government shutdowns, the median fluctuations in the S&P 500, 10-year Treasury yields and the dollar index were all around zero. We believe the impact of a government shutdown is limited to sentiment, and may be short-term positive for safe-haven assets, but there is no sustained impact.
Debt ceiling: Just when the ceiling is reached (Q2 2027), liquidity actually improves, which is positive for bonds and U.S. stocks. At that point, the Treasury will not only stop issuing debt to reduce bond supply, but also use cash in the TGA account to cover spending, achieving a "liquidity injection" effect, which can provide marginal support for bonds and U.S. stocks ("How the Debt Ceiling Can Actually Improve Market Liquidity").
But after the ceiling is resolved (Q4 2027), bond supply and liquidity will face staged pressure, which is unfavorable for term premiums and U.S. stock performance. After the two parties reach an agreement, the Treasury needs to issue debt again to rebuild the TGA account, causing a temporary increase in bond supply and draining some liquidity ("The Debt Ceiling Paradox: The Unavoidable Liquidity Drain"). Reviewing 2023 and 2025: 1) On bond supply, net Treasury issuance in Q3 of those two years reached $1.01 trillion and $1.06 trillion, with supply pressure concentrated at the short end, and short-term debt issuance reaching $794 billion and $613 billion, respectively. In the same period, U.S. Treasury term premiums rose rapidly or stayed high, with staged pressure lasting about one quarter. 2) On liquidity, within three months after the debt ceiling constraint was lifted, TGA balances rebounded by $404.1 billion and $447.1 billion, respectively, equivalent to 7-9% of U.S. liquidity at the time, marginally pressuring risk assets such as U.S. stocks.
Fiscal policy: It marginally reduces debt issuance pressure, but is unfavorable for the earnings recovery of traditional demand and cyclical sectors. After the midterms, intensified partisan brinkmanship may limit room for fiscal expansion. Combined with the share of tradable Treasuries maturing within the next year remaining stable relative to the total, rollover pressure is manageable, and we believe U.S. Treasury supply pressure may weaken. But at the same time, fiscal support for growth will also weaken, especially for traditional demand that is more sensitive to government investment and household purchasing power, which may constrain the earnings recovery of cyclical sectors.
AI: The key is still AI progress, but local regulation may intensify disturbances. Because current AI models and applications both lack clear progress, market expectations are in a "gap period," and high-intensity capital expenditure keeps squeezing cloud vendors' free cash flow, causing growing concerns about the pace of AI revenue realization and return on investment. Our constructed AI stress index has also kept deteriorating since late September. If local governments further tighten regulation and raise AI investment costs, it may intensify market doubts and trigger staged disturbances.
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