SKN | US Midterm Elections Put Congressional Control and Fiscal Policy in Focus

Key Points

•  President Donald Trump’s net approval rating stands at -20 percentage points, while Democrats lead Republicans by 8.9 points in generic congressional voting polls, making a Democratic takeover of both chambers the leading expected outcome.
• The next Congress will face 2027 debt ceiling negotiations, where potential changes to social programme spending and defence allocations could affect the deficit outlook and Treasury issuance.
• AI investment, economic growth, corporate earnings, inflation, and interest rates remain central to the investment outlook, reinforcing the importance of diversification and disciplined portfolio positioning.

Congressional Control Enters a Competitive Election

The US midterm elections place control of Congress in focus, with all 435 House seats and 35 Senate seats contested following a historically expensive campaign season. Current polling points toward a possible Democratic sweep, although the Senate remains closely contested and the eventual size of any majority is uncertain.

RealClear Polling’s average places President Trump’s net approval rating at -20 percentage points. Democrats hold an 8.9-point advantage in generic congressional voting polls. On economic issues, the president’s net approval rating falls to -32 points on the economy and -43 points on inflation.

Early voting data also indicates stronger Democratic participation relative to Republicans than during the 2024 election cycle in several key states. However, early voting does not provide a complete picture of the electorate. Around half of the national vote has been cast on Election Day in recent elections, leaving substantial uncertainty until voting concludes.

The Democratic sweep remains the highest-probability outcome in the supplied election outlook, but polling margins in several Senate races remain narrow. Historical polling errors, turnout differences, and late-emerging electoral factors could still produce a different result.

Legislative Gridlock May Limit Major Policy Changes

A change in congressional control would likely increase oversight of the administration and complicate fiscal negotiations. However, a Democratic majority in both chambers would not automatically translate into sweeping changes to taxation or government spending.

President Trump would retain veto authority, while the executive branch would continue to exercise broad influence over tariffs and foreign policy. These institutional constraints could limit the immediate legislative consequences of an election result while leaving other sources of policy uncertainty intact.

The composition and size of congressional majorities will therefore matter as much as the overall outcome. A particularly narrow majority could intensify internal party divisions and make significant legislative agreements more difficult.

The election may also influence perceptions of the 2028 presidential race and bring longer-term policy priorities into focus. However, it remains premature to assume that markets will sustainably price these political implications before the direction of future policy becomes clearer.

Debt Ceiling Negotiations Could Increase Treasury Market Volatility

The next Congress will soon face the 2027 debt ceiling negotiations, creating a potentially important fiscal risk for bond investors.

The expected negotiations could result in scheduled social programme cuts being softened while defence spending increases. Such developments could reverse an anticipated narrowing of fiscal deficits and contribute to higher Treasury issuance. Political brinkmanship surrounding the debt ceiling could also increase volatility across government bond markets.

The broader interest rate outlook remains a separate consideration. The supplied outlook anticipates moderating inflation, an end to Federal Reserve rate increases, and Treasury yields eventually settling at lower levels. Current yields are viewed as offering attractive income opportunities, although persistent deficits and substantial issuance support a cautious position toward the longest-dated maturities.

For investors managing fixed-income exposure, the distinction between near-term income opportunities and longer-term fiscal risks remains important. Shorter and intermediate maturities may offer a more balanced way to participate in bond markets without taking excessive exposure to long-duration risks.

AI Investment Remains Strong Despite Political Uncertainty

Congressional oversight is unlikely, by itself, to derail the broader artificial intelligence investment cycle. Broad federal restrictions would face both legislative and presidential constraints, while state and local regulations are expected to remain more influential in determining data centre timing and locations.

AI infrastructure demand continues to be exceptionally strong. Aggregate AI capital expenditure forecasts have been raised to USD 1.0 trillion for 2026 and USD 1.4 trillion for 2027, reflecting the scale of investment expected across the sector.

However, rising capital expenditure also introduces questions surrounding overinvestment, financing requirements, and the ability of companies to translate infrastructure spending into sustainable revenue. These considerations are becoming increasingly important as global investors assess the durability of AI-related valuations.

A more selective approach may therefore be warranted. Financially strong technology platforms and infrastructure providers could be better positioned to navigate higher volatility, while diversified exposure across the AI value chain may reduce dependence on individual companies.

Portfolio Positioning Should Prioritise Diversification

The election outcome should not become the sole basis for significant portfolio decisions. Political developments may influence the medium-term outlook, but the principal market drivers remain economic growth, corporate earnings, inflation, interest rates, and the scale of AI investment.

The supplied investment outlook remains constructive on equities, supported by strong earnings and continued AI expenditure. Nevertheless, concentration risk deserves greater attention, particularly where portfolios have accumulated substantial exposure to individual technology companies.

Investors may consider reducing excessive single-name exposure, rebalancing oversized technology allocations, and favouring higher-quality businesses across the AI value chain. These adjustments can help preserve participation in structural growth themes without making portfolio performance overly dependent on a narrow group of companies.

High-quality bonds also offer potential income and diversification benefits, particularly across short- and medium-term maturities. Caution remains appropriate toward the longest maturities given the combination of persistent fiscal deficits and heavy Treasury issuance.

Closing Insights

The US midterm elections may reshape the balance of political power in Washington, but their direct implications for financial markets are likely to be constrained by institutional checks, legislative divisions, and the difficulty of implementing major policy changes. The more immediate market consequences may emerge through fiscal negotiations, Treasury issuance, and shifts in policy uncertainty rather than through the election result alone.

For global investors, the central consideration is maintaining exposure to durable earnings and long-term investment themes while avoiding excessive dependence on political forecasts. AI infrastructure, high-quality corporate earnings, and income-generating fixed-income assets remain relevant portfolio considerations, but valuation discipline, maturity selection, and diversification will be essential if political and market volatility increases.

 

For a confidential discussion regarding retail banking strategy, insurance distribution models, customer loyalty ecosystems, digital financial services, or cross-border financial innovation opportunities, contact our senior advisory team.