US midterm elections: Congress turns blue

It was a decisive victory for the Democrats in the 2026 midterm elections. The party delivered a “blue sweep”, capturing the House after flipping more than 40 seats and reclaiming the Senate by winning key races including North Carolina, Texas, Ohio, Iowa, Kansas and Maine. They won the popular vote by around 13 points and now hold 28 state governorships, up from 23.

The results will put significant constraints on the President for the rest of his term in office. With control of both chambers, the Democrats can block his legislative agenda. The Senate also brings oversight and control of confirmations, and more Republicans may look to distance themselves from the White House. At the same time, the Democrats did not secure a large enough majority to override presidential authority. As a result, we expect limited change to policy direction in the near term.

How do the results impact the policy outlook?

The fiscal path looks broadly unchanged

Policy gridlock likely rules out either fiscal consolidation or additional stimulus for the next two years. Democrats may push for household relief funded by higher taxes on the wealthy and corporations, but those measures would likely encounter a presidential veto.

Government funding poses a more immediate challenge: temporary funding expires on 11 December, and the outgoing Senate still needs Democratic votes. A short extension into early 2027 looks most likely. Thereafter, continued funding of the Iran war seems unlikely with a Democrat-controlled House, creating shutdown risks in late 2027 or early 2028.

The debt limit has always involved extensive brinkmanship and will be key to watch. The debt ceiling is expected to be reached by mid-2027 (though the Treasury’s “extraordinary measures” could extend this by another six to nine months). Most new Democratic senators are swing-state moderates, and with nobody wanting to own a default, a clean suspension remains likely, though not without fanfare. We expect compromise to keep the government running, with no major tax changes. The $2.0 trillion FY26 deficit won't shrink much but shouldn't grow either. Democrats have little appetite to juice the economy ahead of the 2028 elections, and bond market pressure will ultimately act as a constraint, limiting the scope for any material fiscal expansion.

Limited measures to support affordability

Affordability dominated the election, helping drive strong Democratic turnout. Democrats will look to restore Affordable Care Act subsidies and reverse Medicaid cuts but even with control of both chambers, the party will face difficulty in passing major legislation. Overriding a presidential veto requires a two-thirds supermajority in both the House and Senate so President Trump does retain substantial leverage. A 60-vote supermajority, meanwhile, is required to overcome a Senate filibuster – a tactic used to delay or block a vote by extending debate indefinitely. Democrats might be able to secure limited concessions on select healthcare or entitlement priorities, but it seems unlikely they could enact major legislation.

AI buildout – some friction but the train is not derailed

Increasing AI regulation is one area that has attracted bipartisan support from voters and the elections reinforced growing opposition to data centres, particularly in Texas and Ohio, where incoming Democratic governors favour tougher development conditions. 

At the federal level, efforts to limit AI-related data centre construction would likely be met with a presidential veto, but it is possible that we see state-level restrictions, particularly in blue (Democratic-controlled) states. Local moratoriums and tougher permitting could delay projects, raise costs and influence where data centres get built. Higher costs may also accelerate bring-your-own-power solutions and favour well-capitalised hyperscalers over more speculative developers. Hyperscalers are already responding to local concerns: Amazon and Google have each committed $1 billion in community investments over the coming years.

Overall, individual states will need to balance public backlash against the economic benefits of data-centre expansion, including jobs, investment and tax revenues. AI also offers one of the strongest opportunities to boost productivity and address the pressures of high debt, shrinking workforces and ageing populations. The potential productivity gains are too compelling for policymakers to ignore. While public opposition may create some friction, it is unlikely to change the direction of travel. We therefore expect the AI boom to continue, though it may become costlier, slower and more consolidated in the years ahead.

Foreign policy – uncertainty remains

Reduced ability to shape domestic policy means that we could continue to see an unpredictable US presence on the global stage, since foreign policy and trade are areas where the President has more discretionary authority.

On Iran, further strikes are possible, but we expect the Administration to seek a way out within the coming months. Democrats can use Congressional control over spending and oversight to challenge the war, which is unpopular even with grassroots Republicans, while high fuel prices and public opposition are adding to pressure. Our base case is a compromise that supports lower oil prices in 2027.

A Democratic Congress could also increase support for Ukraine, where many Republicans back NATO and Ukraine funding. An aid bill is one of the few that could survive a veto. Hostility toward Canada and Mexico also proved unpopular in border states, which could warm ties with allies and ease trade tensions. However, the President still wields considerable power on tariff policy and even a Blue Congress will be limited in its ability to lower tariffs on its own.

Greater oversight and scrutiny of the Administration

A Democratic-controlled House would be expected to substantially expand congressional oversight of the administration. Committee chairs will gain subpoena authority and control over investigative agendas, increasing scrutiny of the actions of the executive. While impeachment becomes procedurally more plausible under Democratic House control, the removal of a president from office would also require a two-thirds supermajority in the Senate, which is highly unlikely.

Senate control also gives the Democrats some additional powers. Most importantly, the Senate confirms presidential nominations by simple majority, enabling the party to materially shape (or constrain) President Trump’s appointees to the Supreme Court, lower courts or the Federal Reserve (Fed). At the Fed, three of seven governors are Trump appointees. In June, the Supreme Court let Governor Lisa Cook remain in post while her case proceeds. The next two confirmations, Philip Jefferson's vice-chair term in September 2027 and Jerome Powell's board seat in January 2028, will now run through a Democratic Senate. That should limit further changes to the Board’s composition through 2028, reducing risk to Fed independence.

What does this mean for markets?

Overall, the political landscape has shifted meaningfully, but economic and market fundamentals should continue to matter more for markets than the balance of power in Washington. 

In the days that followed the midterm results, tech stocks have come under pressure amid concerns that the “blue sweep” may constrain data centre rollout. We do not believe this concern is well-founded, however, and do not expect recent volatility in the technology sector to develop into a more sustained downturn. We expect that the AI boom will remain firmly on track, but may become costlier, slower and more consolidated in the coming years. For equities, a costlier, more selective AI buildout argues for broadening beyond AI leaders, but massive demand and improving monetisation should sustain investment and create opportunities across sectors. Recent volatility is a reminder of the importance of diversification across sectors and geographies, as well as using core fixed income to help hedge against tech-related volatility.

It is possible that warmer ties with allies may also support non-US stocks, with Europe being a potential beneficiary. The main near-term risk, however, remains renewed escalation in Iran before the new Congress is seated, alongside contentious budget negotiations.

Conclusion

To conclude, despite a meaningful shift in the political landscape, the 2026 midterm results are unlikely to materially alter the economic or market backdrop.

Washington will likely enter a period of policy gridlock. The Trump administration will also likely face greater oversight and scrutiny, while Democrats’ capacity to deliver meaningful change will remain constrained by presidential powers. Reduced ability to shape domestic policy increases the risk that we continue to see an unpredictable US presence on the global stage.

For markets, we believe that the recent rout in tech stocks will not be sustained. The AI train may encounter some friction, but it is still firmly on track. As was the case before the election, diversification within and beyond the AI ecosystem remains critical, given the considerable uncertainty around future AI demand and which companies will ultimately emerge as winners and losers.