US midterms - a decisive win for the Democrats. What now?
The US midterm results have reshaped the balance of power in Washington, with the Democrats taking control of both the House and the Senate. But what does a Democrat-controlled Congress mean for investors? The implications could be significant for President Trump's policy agenda.
Yet while political developments can grab investor attention and impact market sentiment, how much do they affect the return and risks of assets over the longer term? Read our latest analysis on these election results and why economic fundamentals and valuations may matter more than today's headlines.
At a glance
- Democrat control of Congress weakens President Trump’s ability to advance major policy changes without cross-party cooperation.
- This raises the possibility of greater political confrontation with the administration. Yet, it could also present a clearer framework for assessing the likelihood of changes to taxation, regulation and government spending.
- It may allow investors to focus more on fundamentals such as economic growth, inflation, interest rates, earnings and valuations.
In the event, the polls leading up to the midterms greatly underestimated the swing to the Democrats. They have gained control of both the House of Representatives (the House) and the Senate. This gives the party full control of Congress for the remaining two years of President Donald Trump’s term. Given Trump’s record low approval ratings for a second-term president and voter concerns over issues including the economy, foreign policy and immigration, the results should probably come as little surprise.
At first glance, a Democratic clean sweep may appear unsettling for financial markets, raising the prospect of a more active legislative agenda and greater scrutiny of the White House. However, investors are often more concerned by political uncertainty than by the disagreement itself. The election is now settled and the balance of power established for the remainder of this administration.
US midterms – what next for Trump and markets?
Midterm elections are usually tough for a sitting president, whether Republican or Democrat. Both Trump and Joe Biden lost control of the House during their midterms in 2018 and 2022 respectively.
For the remainder of his presidency, Trump will be in a weaker position. While he retains the power to veto legislation, any attempt by Congress to override this will need a two-thirds majority in both the Senate and the House. Trump will have to negotiate with the Democratic leaders in both chambers to pass major legislation, particularly on federal government spending and tax policy. Democrats are also expected to increase scrutiny of the administration. This includes holding hearings, issuing subpoenas and document requests.
Businesses and investors now have a clearer framework for assessing the likelihood of changes to taxation, regulation and government spending. As a result, markets may increasingly focus on economic fundamentals such as economic growth, corporate earnings and valuations, as well as inflation and interest rates.
Anthony McDonald, a multi-asset portfolio manager at SJP adds: “while the Republican Party has lost control of Congress, the impact on the markets may be limited as economic policy uncertainty is already high”.
Some fixed income investors believe that Democratic control of Congress may encourage greater fiscal discipline in areas of government spending. According to Greg Venizelos, SJP’s Fixed Income Strategist, “this could help contain upward pressure on US Treasury yields”.
Yet it won’t be plain sailing. Hetal Mehta, SJP’s Chief Economist adds “US fiscal deficits of 6-7% of gross domestic product are likely to persist. Moreover, President Trump can continue to use executive orders when it comes to foreign policy, leaving geopolitical risks elevated”.
The chart below shows that in the 12-month period following recent midterm elections, the benchmark S&P 500 stock market has averaged double-digit percentage returns. This was irrespective of whichever party was in control of Congress. However, despite the strength of this historic track record, this is no guarantee of future returns. It is the outlook for the economy, inflation, interest rates and corporate earnings that will be more significant for future returns.
While markets cannot predict how sectors and industries will respond to the change in the US political landscape, investors are focusing attention on a number of areas.
Energy
While high energy prices and concerns about supply security will remain important, the traditional oil & gas energy sector could face greater uncertainty. Democrats will likely seek tighter environmental controls while reducing support for fossil fuels. The renewable energy industry could benefit from a more sympathetic Congress.
Technology
With the Democrats controlling Congress, this sector could face greater scrutiny over AI, reflecting competition and data privacy concerns. However, any proposed major regulatory changes would face political and legal hurdles. Restricting advanced technology exports to China would likely find bipartisan support.
Healthcare
A sector likely to enjoy a degree of bipartisan support following the midterms. Democrats could be expected to retain public healthcare programmes. They may also want to expand access to medical insurance, benefitting hospitals and healthcare providers. The pressure to reduce the price of prescription drugs would have support of Republicans as well as Democrats.
Defence
This is another area where Democrats and Republicans enjoy some common ground. However, a Democrat-controlled Congress may seek to limit US involvement in the conflict with Iran or end it altogether. Geopolitical tensions support higher defence budgets. Scrutiny in Congress will likely be on what to prioritise. This may include replenishing stocks of ‘dumb’ ordnance, such as bullets, artillery shells and bombs, as well as investing in high tech areas such as missiles, drones, cybersecurity and military technology.
Summary
Now that Democrats control both chambers of Congress, investors have a clearer understanding of what this administration can realistically achieve. While President Trump retains significant powers, he will need to work with Democratic leaders in Congress to advance any major policy changes.
While political developments can garner a lot of investor attention and impact market sentiment, our investment approach remains focused on identifying the factors that drive the return and risk of assets over longer term horizons. Rather than preparing or responding to any single market event, we deliver a disciplined, long-term approach to portfolio construction. Our portfolios are regularly reviewed to ensure they remain aligned with our investment convictions and long-term opportunities.
This includes maintaining a valuation-aware approach. This involves reducing exposure to areas where valuations appear stretched and allocating capital to assets with the potential for stronger risk-adjusted returns over time. We seek to enhance diversification by reducing concentration risk and broadening exposure to a wider range of return drivers. Together with ongoing refinements to defensive exposures, these measures help ensure portfolios remain resilient and well positioned to deliver positive long-term client outcomes across a wide range of market environments. When investing, returns are not guaranteed as values can fall as well as rise. When investing, returns are not guaranteed as values can fall as well as rise.
* Past performance is not indicative of future performance. Please note it is not possible to invest directly into an Index and the figures shown do not take into account any charges applicable to the appropriate investment wrapper or any relevant tax charges.
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SJP Approved 04/11/2026
