Chief Market Strategist, Asia Pacific
In brief
- The U.S. mid-term elections in November could see the Democrat Party regain a majority in the House of Representatives, although winning the Senate is a longer shot.
- A divided Congress would likely see more constraint on the Trump administration’s ability to expand fiscal policy to boost growth.
- U.S. President Trump still has a number of tools at his disposal that could impact markets. Tariffs, regulation enforcement, and foreign policy are areas where the administration could still make an impact without collaborating with Congress.
On November 3, all 435 seats in the House of Representatives and 33 of the 100 Senate seats will be contested. While five months is ample time for public sentiment to shift, historical patterns and the current economic backdrop still offer useful guidance for investors. Ultimately, economic growth and corporate earnings will remain the dominant drivers of asset returns. However, the election outcome could constrain fiscal policy and increase reliance on executive action in the latter half of U.S. President Trump’s term.
A divided Congress
Midterm elections have historically served as a referendum on the sitting president. Over the past century, the president’s party has lost House seats in all but three midterms (1934, 1998, and 2002). With Republicans currently holding only a narrow four-seat majority in the House, historical precedent suggests a high probability that Democrats could regain control. Public approval for U.S. President Trump and his party has also been pressured by rising living costs, particularly the recent increase in gasoline prices.
In contrast, the Senate map is more favorable to Republicans. Given the specific seats up for election and the vice president’s tie-breaking role in a 50–50 scenario, Republicans still have a reasonable chance of retaining control.
A divided Congress would make it more difficult for the president to advance legislative priorities, especially on fiscal policy. That said, the Trump administration has already demonstrated a willingness to rely on executive authority to implement key policies, including tariffs and foreign policy actions such as its stance toward Iran.
Fiscal constraints
Recent administrations have relied on the budget reconciliation process to pass major fiscal legislation, as it allows bills to pass the Senate with a simple majority rather than the 60 votes required to overcome a filibuster. U.S. President Trump’s “One Big Beautiful Bill Act” (OBBBA) in 2025 is a recent example.
If Democrats take control of the House, even this budget reconciliation route becomes more challenging. Any fiscal package must first pass the House, requiring bipartisan support. Policies such as further corporate tax cuts, increased defense spending amid tensions with Iran, or reductions in social spending are likely to face strong opposition from Democrat lawmakers. As a result, the probability of additional fiscal stimulus would decline unless the economy deteriorates significantly, even though the Trump administration could redirect some of the approved funding to boost household spending.
At the same time, a sharp reduction in the fiscal deficit also appears unlikely. A Republican-controlled Senate would probably resist tax increases needed to materially narrow the deficit. The spending required to replenish munitions used in the Middle East conflict and potential revenue losses from legal challenges to tariffs could also limit fiscal improvement. Finally, much of the fiscal deficit facing the U.S. federal government today comes from interest expense (Exhibit 1).
The debt ceiling adds another layer of uncertainty. The 2025 OBBBA raised the U.S. debt ceiling by USD 5trillion to USD 41.1trillion. Estimates from the Center on Budget and Policy Priorities suggest this limit could be reached by 2027. There is little doubt that the debt ceiling will eventually be raised, but the political posturing en route to this compromise could still keep the bond market on edge.
Greater reliance on executive action
With legislative avenues constrained, the administration is likely to rely more heavily on executive powers. Key policy areas such as trade and immigration largely fall within executive authority.
Although the Supreme Court has ruled that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) are unlawful, alternative legal pathways are being pursued. Investigations by the Department of Commerce and the U.S. Trade Representative into unfair trade practices could provide a more durable legal basis for tariffs.
Immigration policy is also expected to remain restrictive, limiting labor supply growth. In foreign policy, the administration retains broad discretion, including the use of military force against economies deemed hostile, such as Iran.
Together, tighter trade and immigration policies present upside risks to inflation, which could in turn constrain the Fed’s ability to ease monetary policy.
Economic fundamentals matter more
While the midterm elections will increasingly dominate headlines, the macroeconomic environment remains the primary driver of markets (Exhibit 2). Historically, volatility tends to rise ahead of elections due to uncertainty, then decline once results are known, regardless of which party prevails.
A potential fiscal stalemate could be supportive for long-duration government bonds, as it reduces the likelihood of a significant increase in deficits beyond current projections. However, debt ceiling negotiations could trigger periodic volatility in bond markets.
On regulation, some changes require congressional approval, particularly those involving new legislation. However, the administration retains meaningful flexibility through adjustments to agency rules and enforcement practices. For example, regulators could modify the stringency of bank stress tests without new laws. As a result, the overall regulatory trajectory may not shift dramatically based on the election outcome.
In sum, while political developments will shape the policy environment, their impact on markets is likely to be secondary to the broader economic cycle and earnings outlook.