According to Zhitong Finance APP, the Democratic Party won a landslide victory in the US midterm elections, capturing control of both the House and Senate. Michael Townsend, Managing Director of Legislative and Regulatory Affairs at Charles Schwab, stated that the Democrats' margin of victory far exceeded market expectations, and that developments surrounding a government shutdown and the debt ceiling should be monitored going forward.
Markets dislike uncertainty, so regardless of the election outcome, markets typically respond positively. Townsend explained that once an election concludes, markets and investors can assess, based on the distribution of power in Washington, how much political and policy decisions over the next two years might impact the market. The next two years will maintain a divided government structure, with Republicans controlling the White House and Democrats controlling both chambers of Congress. This will likely plunge Washington into political gridlock. Markets generally do not mind this, as it helps reduce the likelihood of large-scale policy changes by the government, thereby lessening the potential impact on companies, earnings, and markets.
Historical data shows that after midterm elections conclude, regardless of which party wins, markets generally perform well. An analysis conducted by the Schwab Center for Financial Research based on historical market data shows that since 1974, six months after every midterm election, the S&P 500 Index has recorded gains, with an average return of 12.4%.
He also noted that the election results will make the lame-duck congressional session beginning next week more challenging, with the federal government facing a shutdown risk in December. The current Congress will return to Washington on November 9, and Republicans may find it difficult to advance their agenda as desired. One of the must-address issues is the federal government funding set to expire on December 11. If no agreement is reached to extend funding before the deadline, the federal government will shut down. Given the current severe political situation, the possibility of a government shutdown next month cannot be ruled out.
Townsend believes that the 2027 policy-making environment will also be extremely complex, with the debt ceiling battle becoming the biggest policy issue Congress faces next year. The President and Democrats must cooperate to prioritize raising the debt ceiling, a figure set at $41.4 trillion last year. However, with total debt surpassing $40 trillion in August, the US is expected to hit the debt ceiling in early to mid-2027, at which point the Treasury will no longer be able to borrow.
Additionally, with Democrats leading Congress, markets expect cryptocurrency and data centers may become policy focal points, including pushing a stricter version of legislation regulating cryptocurrency companies next year. Data centers may also become a policy issue in 2027, which could have a significant impact on artificial intelligence companies and hyperscale cloud service providers.
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