The Democratic sweep of Congress will significantly weaken President Trump's governing capacity over the next two years, likely intensifying political gridlock, though it is unlikely to fundamentally alter his policy direction.
The U.S. midterm elections were held on November 3 local time. As of 19:00 Beijing time on November 4, Democrats had captured both the Senate and the House. In the Senate, Democrats secured 54 seats and reclaimed control, flipping key states including North Carolina, South Carolina, Texas, Ohio, Iowa, and Kansas. North Carolina broke the Republican Party's 18-year winning streak in Senate elections in that state, while Texas elected its first Democratic federal senator since 1988. In the House, Democrats won 231 seats and retook control as expected.
Trump stated he was "absolutely willing to accept the election results," but simultaneously made clear he would use the veto power as his core tool to counter the Democratic legislative agenda, meaning Washington will enter a landscape of legislative deadlock and veto politics coexisting after the sweep.
Market pricing for a Democratic sweep of both chambers surged dramatically during election day trading, with various asset classes showing clearly directional but unevenly sized reactions: U.S. equities displayed significant structural divergence, with the Dow falling 0.38% for the day while the Nasdaq rose 0.83%. Treasury yields rose on November 3, but in the early hours of November 4 Asian time, as vote counting progressed and sweep expectations intensified, the 10-year yield in Treasury futures and continuous trading fell back to around 4.89%–4.91%.
Impact of a Democratic Sweep of Congress
The Democratic sweep of Congress will significantly weaken President Trump's governing capacity over the next two years, likely intensifying political gridlock, but it is unlikely to fundamentally change his policy direction. With simultaneous control of both the Senate and House, Democrats can strengthen checks on the White House through agenda-setting, fiscal appropriations, committee investigations, and personnel appointment reviews. Trump's ability to advance major legislation on tax cuts, welfare reductions, and immigration reform will be notably constrained, and government funding and debt ceiling negotiations may become more frequent. At the same time, Democrats can block cabinet and judicial appointments and could initiate impeachment in the House and hold trials in the Senate, though conviction remains unlikely without a two-thirds majority.
Nevertheless, Trump still holds executive power and presidential veto authority, with considerable discretion in tariffs, diplomacy, and military affairs. Existing policy directions are difficult to fully reverse, and his governance focus may shift more toward executive orders and foreign policy.
First, fiscal expansion space is constrained, and debt ceiling negotiations heat up.
A Democratic sweep of Congress will compress the Trump administration's room for new fiscal expansion, but it is unlikely to change the long-term trend of high deficits and high debt in the U.S. The Trump administration's major fiscal policies have already been implemented through the 2025 One Big Beautiful Bill, and there was already a lack of new large-scale stimulus plans for the following two years. With Democrats controlling both chambers, Republicans can no longer use the budget reconciliation process to further cut taxes or expand defense spending. While Democrats could lead the budget reconciliation process to push for increased livelihood spending or tax policy adjustments, Trump still holds the presidential veto, and major fiscal pivots would still require bipartisan compromise, making it likely that fiscal policy continues along the existing framework.
With new fiscal legislation constrained, the debt ceiling may become the primary focus of bipartisan fiscal confrontation. The One Big Beautiful Bill raised the statutory debt ceiling from $36.1 trillion to $41.1 trillion. As of October 30, U.S. debt subject to the statutory ceiling had risen to $40.33 trillion, leaving only about $0.78 trillion in headroom. After the Democratic sweep, Democrats can dominate the agendas of both chambers and may bundle debt ceiling increases with demands for increased livelihood spending and delays to Medicaid cuts, while Trump and Republicans want tax cuts and protection for defense and border security. Bipartisan divisions raise the difficulty of negotiations and the risk of approaching the "X-date," elevating government shutdown risks, potentially tightening liquidity in phases, and amplifying financial market volatility.
Second, AI investment expansion continues, with regulatory constraints marginally strengthened.
A Democratic sweep of Congress will strengthen AI legislation and oversight, but it is unlikely to change the overall direction of continued AI investment expansion. With Democrats controlling the agenda in both chambers, they may strengthen regulation in three areas: first, requiring large technology companies to bear more grid expansion costs and disclose data center electricity, water, and carbon emission information; second, promoting frontier model safety testing, third-party audits, and major incident reporting mechanisms; and third, addressing AI's impact on employment through expanded unemployment insurance, enhanced vocational training, and transitional income support.
However, the Trump administration advocates accelerating AI infrastructure construction and opposes mandatory licensing regimes. Related restrictive legislation may still face presidential veto, and the probability of a nationwide pause on AI investment or data center construction is low. Given the difficulty of comprehensively restricting AI investment at the federal level, state and local governments may become the primary force constraining data center construction. According to the National Conference of State Legislatures (NCSL), 39 states have proposed data center and electricity-related bills, 31 states are discussing water usage issues, and 15 states are considering pausing or restricting data center construction. Tighter regulation is more likely to bring industry and regional divergence rather than ending the AI investment cycle. Large technology companies will face rising electricity, compliance, and construction costs, and the market will focus more on capital expenditure efficiency; grid equipment, power generation, energy storage, and energy-saving technologies may continue to benefit.
Third, domestic legislative space narrows, and executive power and foreign policy may become breakthrough points.
Tariffs, sanctions, export controls, and limited military actions depend relatively less on new legislation, and Trump still has considerable room for action. According to Reuters, the White House has begun identifying executive measures that can bypass Congress, including imposing tariffs on critical minerals and other goods, adjusting federal funding uses, and strengthening immigration restrictions. Over the next two years, the unilateral nature and uncertainty of U.S. policy may further increase.
Tariff policy will face stronger oversight, but the possibility of a complete reversal remains limited. After the Democratic sweep, Democrats can push in both chambers to repeal some tariffs, limit presidential tariff authority, and conduct investigations into tariff exemptions, trade negotiations, and price impacts. However, most related bills may still face the 60-vote threshold in the Senate, and even if passed by Congress, they could be vetoed by Trump. Democrats would still struggle to obtain the two-thirds majority in both chambers needed to override a presidential veto. Therefore, existing tariffs are likely to continue, while universal tariffs on all trading partners and tariffs on allies may face more constraints.
A Democratic sweep of Congress will strengthen appropriations and war powers constraints on U.S.-Iran conflicts, but it is unlikely to unilaterally end military operations. The Trump administration previously proposed a supplemental appropriations request including $67.1 billion in defense funding and sought to increase defense spending through the budget reconciliation process, with House Republicans already proposing $60 billion in related funding arrangements. With Democrats controlling both chambers, they will be able to block Republicans from unilaterally passing a new budget reconciliation bill and strengthen oversight of military operations through restricting or conditionally approving supplemental appropriations, pushing war powers resolutions, holding hearings, and conducting investigations, requiring the White House to explain military objectives, operational costs, and exit arrangements. Similarly, legally binding restrictive measures may still be vetoed by Trump, and Democrats would struggle to obtain the two-thirds majority needed to override a veto.
Although Trump may still use presidential authority to conduct limited military strikes and continue pressuring Iran through sanctions and diplomatic negotiations, funding and legal constraints on sustained, large-scale military operations will be further strengthened, and the U.S.-Iran situation may repeatedly switch between pressure, conflict, and negotiation. It is worth noting that the new congressional term begins on January 3, 2027, and before that, Republicans still control both chambers of Congress, so short-term escalation risks still warrant vigilance.
Review of Asset Performance Around Past Midterm Elections
Overall, midterm elections have a clear "ruling party punishment" characteristic. The president's party has lost House seats in 18 instances, with only 1998 and 2002 as exceptions, averaging about 26 seats lost each time; it has lost Senate seats in 13 instances, averaging about 4 seats lost. Of 20 elections, House and Senate control changed 7 times each, with at least one chamber changing hands in 10 instances, including 1946, 1954, 1994, and 2006 when both chambers flipped simultaneously.
Reviewing asset performance around past U.S. midterm elections, U.S. equities showed the most notable gains, gold and Treasury bonds generally benefited, and the dollar tended to weaken. Midterm elections mainly affect markets through policy expectations and risk appetite, while actual asset trends still depend on economic fundamentals, monetary policy, and geopolitical factors. Specifically, for U.S. equities, uncertainty is stronger before elections and stocks typically underperform; after election results are settled and policy paths become clearer, risk appetite recovery drives stocks higher. For Treasury bonds, post-election cooling of new fiscal expansion expectations, combined with fading political uncertainty, pushes 10-year Treasury yields lower. For the dollar, falling Treasury yields erode the dollar's interest rate advantage, and fading uncertainty also reduces safe-haven demand for the dollar, causing it to generally weaken in a volatile manner, though it may still strengthen when the economy clearly outperforms other countries or systemic financial risks rise. For gold, declining real Treasury yields and a weaker dollar reduce the opportunity cost of holding gold, and if geopolitical risks persist, gold tends to rise in a volatile manner.
Impact on Subsequent Market Trends
U.S. equities are short-term bearish with structural divergence. Democratic control of both chambers will push for marginally tighter AI regulation and address AI's employment impact through expanded unemployment insurance and vocational training. In September, the House passed the "Ratepayer Protection Act," requiring state public utility regulators to consider having large data centers and other high-load electricity users bear the incremental costs of new power generation, transmission, and distribution facilities. This means large technology companies will face rising electricity, compliance, and construction costs, and the market will focus more on capital expenditure efficiency; grid equipment, power generation, energy storage, and energy-saving technologies may continue to benefit. Combined with constrained fiscal expansion space and narrowed domestic legislative space, U.S. equities in the short term are more likely to show structural divergence with technology/AI under pressure while policy-beneficiary sectors such as healthcare and renewable energy relatively outperform. However, after the midterm elections are settled, policy paths will become clearer, and risk appetite recovery may provide an overall boost to U.S. equities.
Treasury yields will fluctuate at high levels with limited downside. In the short term, a Democratic sweep of Congress will compress Trump's room for further tax cuts and expanded defense and border spending, cooling fiscal expansion expectations. Combined with safe-haven demand from recent AI-related asset adjustments, this may push Treasury yields lower in phases. However, U.S. mandatory spending and debt interest will continue to grow, both parties lack the incentive to push for large-scale fiscal austerity, and the landscape of high deficits, high debt, and large-scale Treasury supply is difficult to change, limiting the downside for Treasury yields. After Democrats take control of Congress, debt ceiling and government funding negotiations may intensify, pushing up term premiums and amplifying market volatility. Meanwhile, Trump still has considerable executive discretion in tariffs, diplomacy, and limited military actions, and geopolitical conflicts, energy inflation, Fed rate hike expectations, and AI capital expenditure and debt financing needs will continue to support long-end rates. The 10-year Treasury yield may mainly trade in the 4.7%–5.6% range during the year.
The dollar index will continue fluctuating at high levels. Constrained fiscal deficit expansion pushes Treasury yields lower in the medium term, somewhat eroding the dollar's interest rate advantage, and fading political uncertainty will also reduce safe-haven demand for the dollar. Historically, the dollar has generally fluctuated weaker around midterm elections. However, the weakness brought by a Democratic sweep is more likely to be a phased, moderate repricing. Supported by the U.S. economy's continued resilience, the Fed's firm anti-inflation stance, and interest rate differentials amid elevated Treasury yields, the dollar index is unlikely to weaken significantly unless the U.S.-Iran situation clearly de-escalates, and will most likely maintain high-level fluctuations.
The RMB exchange rate will fluctuate in both directions with an upward bias. Recently, the RMB has performed relatively strongly. Since mid-September, while the dollar index rose from below 99 to around 102, the RMB continued to appreciate unilaterally against the dollar, breaking through 6.65 yuan on November 2, hitting a more than four-year high. In the foreign exchange market, the settlement rate has also rebounded notably, from 57.2% in July to 65.3% in September. Going forward, as Treasury yields decline in the medium term, the China-U.S. interest rate differential narrows, combined with a phased weakening of the dollar, this will further support the RMB. However, on November 3, the People's Bank of China raised the foreign exchange deposit reserve ratio for financial institutions, releasing a clear signal of exchange rate stabilization, helping to break the one-sided appreciation expectations of some market participants, stabilize market expectations, and maintain smooth operation of the foreign exchange market. The RMB exchange rate is expected to fluctuate in both directions within the 6.6–6.7 range with an upward bias for some time.
Gold will experience relatively wide-range fluctuations. Historically, after both chambers change hands, gold has risen an average of more than 10% within 6 months. Under the current scenario of a Democratic sweep of both chambers, constrained fiscal expansion, increased difficulty in debt ceiling negotiations, and elevated government shutdown risks all provide phased or structural support for gold. At the same time, a medium-term decline in real Treasury yields will also reduce the opportunity cost of holding gold. However, geopolitical conflict uncertainty remains strong, and Fed rate hike expectations are also relatively strong, so international gold prices may still maintain a relatively wide-range fluctuation pattern in the short term.
Crude oil will fluctuate widely at high levels. Democratic control of both chambers will strengthen appropriations and war powers constraints on U.S.-Iran conflicts, but it is unlikely to unilaterally end military operations. Although Trump may still use presidential authority to conduct limited military strikes and continue pressuring Iran through sanctions and diplomatic negotiations, funding and legal constraints on sustained, large-scale military operations will be further strengthened, and the U.S.-Iran situation may repeatedly switch between pressure, conflict, and negotiation. If credible negotiation progress subsequently emerges and shipping safety in the Strait of Hormuz improves, oil prices will come under pressure and decline; but if Democratic checks on Middle East policy are interpreted by the market as a decline in U.S. regional deterrence, or if Iran uses U.S. policy vacillation to raise its negotiating demands, oil's "diplomatic peace premium" could quickly reverse into an "uncertainty premium." Overall, oil prices may continue to fluctuate widely at high levels in the future.
(Wen Bin is Chief Economist at China Minsheng Bank.)
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