The 2026 midterms swept Democrats into control of both chambers of Congress in a bigger-than-expected blue wave. Here's what it means for the economy, markets, and the US dollar; plus, we cover what will probably stay the same. Key takeaways: Position for modest growth drag: Expect a slight GDP and equity headwind over the next one to two years, but size it as a secondary investment theme, not a primary one. Watch the AI regulatory tail risk: State-level Democratic gains in Texas and Ohio could tighten data center oversight, which is a real risk for AI infrastructure exposure. Don't overplay the policy reversal: The White House still controls tariffs and foreign policy, so treat deregulation slowdowns as incremental, not thesis-breaking, when sizing financials and energy. The U.S. midterm election has yielded the expected shift in Congressional control from the Republicans to the Democratics. The magnitude of the swing was even larger than expected, representing what is being called a blue wave or even a blue tsunami. Despite its magnitude, we believe the shift constitutes just a small negative for economic growth and the stock market, may modestly constrain inflation and bond yields, and could be a subtly negative force on the U.S. dollar. The implications for public policy, the economy and financial markets must not be exaggerated: much remains in the hands of the White House, both in the context of executive orders and the presidential veto. Election outcome The Republicans have lost their majority in both the House of Representatives and the Senate, in both cases by a profound margin. The Democrats have also wrested control of most of the country’s governorships. A pivot toward the Democrats in the House of Representatives had been universally expected since the start of the year, and it is something of a midterm tradition for voters to punish the party of the president. But the expected swing had been relatively small. The Democrats needed just three more seats to capture the majority, whereas in practice, it appears they’ve flipped more than two dozen. Senate expectations had swung back and forth over the past year, as the price of oil ebbed (pro-Republican) and flowed (pro-Democrat). The Democrats were ahead going into the election and appear to have crystalized that outcome with a big 54 out of 100 positions. Clearly, the polls underestimated the Democrats. Whereas the conventional wisdom going into this election was that the Republicans had traditionally been underestimated, as per the presidential election years 2016, 2020, and 2024, this wasn’t actually a particularly sound argument. The last two midterm election years (2018 and 2022) had been essentially unbiased, and the special elections held in 2025 had underestimated the Democrats. What hasn’t changed While this election brings consequences we will detail shortly, its implications for public policy, the economy, and financial markets should not be exaggerated. For one, there are plenty of other potentially more powerful macro themes to consider, ranging from the level of interest rates to high oil prices to the AI outlook. This is a secondary investment theme, not a primary one. Second, the White House retains firm control of tariffs and foreign policy. These have been key policy forces of global relevance and will not be significantly altered by the recomposed Congress. The same goes for constrained immigration. Third, presidential power has substantially increased across recent administrations, such that Congress is simply less important than it once was. As such, this election matters less. Fourth, the checks and balances within the U.S. political system are such that an enormous Senate majority is needed to comfortably pass legislation. The Democrats managed big gains but remain well short of the necessary 60 vote supermajority. Fifth, the Democratic Party is somewhat divided at present, with a resurgent far left wing not entirely aligned with the more traditional moderate wing (which itself has just been bolstered by victories in traditionally Republican regions). It remains to be seen the extent to which the two groups can alight upon mutually agreeable policies to pursue. Sixth, politics are only temporary. This new political configuration only lasts through 2028, and voters will have every opportunity to oust politicians who pursue ill-advised policies. An important question alongside all of this is whether the White House might respond to this public rebuke by tempering some of its less popular initiatives, such as tariffs or the war with Iran, but this seems unlikely. With no further elections taking place throughout the remainder of President Trump’s final term, it is more likely the White House will continue on his bold course. With Democrats back in charge of Congress, President Trump could again be subjected to impeachment efforts, much as he was during his first term. But it remains very unlikely that he will be removed from office altogether, given the extremely high two-thirds majority required in the Senate. Slightly negative economic and stock market implications Over the medium run (in the next year or two), we believe this election result constitutes a mild negative for U.S. GDP growth and the U.S. stock market, which may slightly temper U.S. inflation and U.S. bond yields, and it could put a modicum of downward pressure on the dollar. There is diminished scope for fiscal stimulus in the coming years. This is primarily because a divided government—Democrats in Congress and a Republican in the White House—are classically less expansive. It is hard for the two parties to agree on what goodies to deliver to voters, and so fewer are. Secondarily, the Democrats have recently styled themselves as the party of fiscal responsibility, and so under their guidance, the public debt may not grow quite as quickly over the next few years. This would be a short-term GDP negative, though a long-term fiscal positive. The budget itself will be more difficult to pass, given that it will now require cooperation across parties. It wasn’t exactly easy, even when the Republicans had the majority in both chambers. The U.S. is next expected to hit its debt limit in late 2027 or early 2028, and raising it could be quite contentious, providing support for a steep yield curve. The Democrats are the less business-friendly party. But concerns about the risk of major Democrat-led tax hikes are overblown. The Democrats would need to get any such legislative efforts past the presidential veto, which is unlikely. At best, they might attach minor provisions to must-pass spending bills. And last year’s One Big Beautiful Bill Act permanently enacted major pro-business (and pro-growth) changes, including bonus depreciation, R&D expensing, and lower individual tax rates. Therefore, these are not at serious risk of accidental reversal. Perhaps the most relevant change under this new political configuration is the scope for further tax cuts and the like are now dimmed with the loss of Republican control. In turn, this is stock market negative. The Democrats certainly gain the ability to make life more difficult for corporate leaders by subjecting them to closer scrutiny via their newly gained subpoena power and heightened influence over a range of key Congressional committees. Republican deregulation efforts, of greatest benefit to the financial and energy sectors, may be slowed by the addition of Democrat influence. But they will not necessarily be halted altogether, as much has been happening through executive orders rather than legislative actions. Sector considerations Both parties are expressing a measure of concern about the rate at which AI is racing ahead, though the Democratic Party’s concerns seem more acute, both regarding potential job losses and the adverse consequences of rampant data center construction. While President Trump would presumably veto any national legislative effort to limit construction, state-level elections (including a notable Democratic shift in both Texas and Ohio) could yield a less friendly environment for data center construction in some of the key states for the industry. The adverse implications extend into the utility sector and the demand for electricity. We still believe there is enough room for geographic arbitrage. Data centers can still be constructed in other more receptive states such as Louisiana, Mississippi, West Virginia, and Indiana, such that the rate of AI advancement in the U.S. will be only modestly dimmed. In the energy space, one might imagine a less supportive environment for fossil fuels versus a more supportive one for green energy. But any shift is likely to be quite minor due to the inability to legislate, and high energy prices mean politicians of all stripes will be loath to get in the way of initiatives that might reduce living costs for Americans. In the defense sector, the Democratic Party is broadly less supportive of high spending. But the Republicans may manage to pass the defense spending bill for 2027 before the transition of power, and even if this is not the case, it may be difficult for the Democrats in practice to be accused of putting deployed American troops in harm’s way by underfunding them or refusing to restock the country’s depleted supply of munitions. In theory, acts of war are supposed to require Congressional approval, but the White House has managed to maneuver around that. In healthcare, the Democratic Party has been pushing for stricter controls on drug pricing. There is a scenario in which the Democrats partner with President Trump, who has also advocated for lower drug prices. More generally, all politicians are acutely sensitive to pocketbook economics right now, and perhaps there will be limited scope for household-supporting measures in the two years ahead. Still, this is merely an upside risk rather than a forecast. Slightly lower yields Historically, Republican governments are associated with slightly higher yields and Democrat governments with the reverse. Thus, a shift in the direction of the Democrats makes a flimsy case for lower yields. From a fiscal standpoint, a divided Congress is likely to be a bit less stimulative, which means marginally less bond issuance—bond yield-negative. A tricky debt ceiling deadline toward the end of 2027 or in early 2028 could contribute to a steep yield curve as that issue comes to a head, however. More fundamentally, monetary policy should not be greatly altered in one scenario versus the other, though it might be slightly less restrictive if there were less fiscal stimulus and a slightly less business-friendly economic environment. Via its newfound control of the Senate, the Democratic Party will now have some say over future nominees to the Fed, which may in turn limit the White House’s attempt to stack the voting committee with dovish governors. But this doesn’t so much make the Fed more hawkish as it fails to make the Fed more dovish. And the risk of a policy error diminishes if centrists are appointed, which is bond market-positive. Note that the Democrat-led Senate will also get to serve as a gatekeeper for the appointment of future Supreme Court justices and other senior bureaucrats, though the economic and market implications are hard to judge from this distance out. Marginally weaker dollar We have a longstanding secular view that the U.S. dollar should gradually decline over time. The midterm election perhaps marginally adds to that claim. Dollar-negative forces include the prospect of slightly less fiscal expansion and a slightly slower rate of economic growth. In the near term… We do not expect any fireworks out of the lame duck session between November 4 and January 3. Past such periods have often underwhelmed, and ousted Republicans don’t have much incentive to support new White House proposals. Thus, the odds of major last-minute tax reform are low. Some things do have to happen over the lame duck period, however: A large swath of government funding expires on December 11, so Congress will presumably seek to extend that into the New Year. Similarly, some government funding, including certain healthcare provisions, expires on December 31, and the existing government should extend these. The Republican Party will likely seek to pass defense spending legislation for 2027 before the Democrats gain control. The Republican Party has indicated hopes to raise the debt ceiling before the end of the year, though pundits assign a relatively low probability to this. If not addressed, it will become a pressing issue roughly a year later. Although we assign a slightly negative medium-term stock market implication from this election result, the short run could be different. Markets have historically weakened in the months leading up to midterm elections (as we've seen recently) and then frequently outperformed over the final two months of the year. What's more, the calendar year after a midterm election has, on average, been the strongest of the four years in the presidential cycle. That said, this pattern is probably not worth much given how many other factors are in play. The stock market is on the rise days after the election. We would ascribe this to relief that the election result is clear, as well as the fact that, per his post-election comments, President Trump will work with the Democrats. The market may also be hoping that President Trump reconsiders some of his more damaging policies, such as the war with Iran and tariffs. But in practice, there is likely limited scope for significant cooperation. President Trump has not shown a great deal of ideological flexibility in the past, and so we still believe the medium-term stock market implications are slightly negative rather than positive. Conclusion The direction of travel in this election was not a surprise, but the magnitude of the political swing was. The results constitute a significant rebuke of the White House, and within this, a complaint about high oil prices and tariff induced inflation. We believe the net implications will be slightly GDP- and stock market-negative, may subtly help to tame inflation and bond yields, and could nudge the U.S. dollar downward. But the implications should not be over-estimated. This is still a powerful White House, and it retains control over a raft of key policy levers, including tariffs and foreign policy. It can also play spoiler to limit Democratic Party legislative ambitions.