US midterms: three paths through a divided Congress

US voters head to the polls on 3 November with control of Congress at stake. Republicans hold a three-seat Senate majority and the House of Representatives by only one seat, leaving both chambers in play. While midterms typically have less market impact than a presidential election, the outcome could still influence fiscal policy, legislative priorities and periods of market volatility.

The House comprises 435 seats, allocated to states by population, with all seats contested every two years. With only a single-seat majority, the Republican party is particularly vulnerable. Due to its numerous smaller districts, the lower chamber has historically tracked national sentiment more closely than the upper house, and presidential approval has been one of the most reliable leading indicators of midterm results in the post-Second World War period. The president’s party has lost the midterm elections in 18 of the last 20 midterms, with the scale of those losses correlated with the president’s approval rating (see Exhibit 1).

Currently, Donald Trump’s approval rating is among the weakest readings for a sitting president in recent decades: polling shows roughly three-fifths of those surveyed disapprove of his actions. This results in a net approval score near -25pts, which contrasts with President Trump’s approval rating of -10pts at this point in his first term and Joe Biden’s score of -9pts by this point in his term. Polling shows that Mr Trump’s approval is particularly low on the economy, inflation and trade, reflecting concerns about the cost of living and growing dissatisfaction with his foreign policy decisions (see Exhibit 2). Unfortunately for Republicans, polling also shows that the economy and inflation are the most important issues facing voters.

Divided control limits legislation to basic funding bills, raising the risk of standoffs over funding deadlines and the debt ceiling. Expect volatility to build around the 11 December funding deadline and the spring 2027 debtlimit fight. Risk is likely to be concentrated in short-dated US Treasury bills and the front end of the yield curve. Each standoff may briefly lift the US dollar and gold, but a lasting shift is unlikely. Gridlock has historically supported equities by locking in the status quo, even as event risk rises. It would also leave nominal spending broadly flat. Against a backdrop of elevated inflation and the cuts enacted in last summer’s One Big Beautiful Bill Act, that points to a diminishing fiscal boost in real terms.

Even with a Democratic sweep, Mr Trump keeps his veto, and a Democratic Senate majority likely wouldn’t be large enough to override it. Democratic leadership will need to balance pressure from the progressive wing while extracting concessions on funding and debt limit deadlines. Expect heavier oversight of the executive branch, friction over Federal Reserve and Supreme Court nominations, and pushback on immigration enforcement funding and deregulation. Equity performance would likely hinge on how strong the progressive wing looks on election night – expect weakness if support grows for AI/ data centre regulation, wealth taxes, or “Medicare for all”. More moderate priorities, such as repealing SNAP/ Medicaid cuts, could help healthcare and consumer staples. A risk-off reaction would likely steepen the Treasury yield curve slightly. The overall macro picture resembles the split-Congress case: limited fiscal tightening and a deficit that stays wide.

Republicans retaining control could be the most fiscally consequential outcome. Single-party control opens the door to another reconciliation bill – passable with a simple Senate majority – covering permanent tax cuts, possible direct-payment stimulus and higher defence spending as well as continued financial deregulation. Defence, financial services and energy equities would likely benefit. This is the most expansionary path for the deficit, raising the risk of higher Treasury issuance, a rising term premium, a steeper yield curve, and near-term dollar strength on growth and inflation expectations. The tradeoff is cleaner governance: single-party control would lower the risk of shutdowns or debt-ceiling standoffs compared with the other two scenarios.

Under all three outcomes, fiscal consolidation is essentially off the table. And slim majorities or divided government would raise political uncertainty. The nearterm risks are the 11 December funding deadline and the spring 2027 debt-ceiling cliff. The bigger long-term threat remains mandatory spending: social security and Medicare are on track for insolvency by the early 2030s, which would force steep benefit cuts.

AI and data centre regulation will likely draw more rhetoric in any scenario, given bipartisan support for reform. But the data centre build-out remains largely a local issue and the outcome of the midterms won’t meaningfully slow compute’s progress. Strong executive branch support for AI, plus geopolitical pressures, should keep material opposition in check.

Regardless of results, Mr Trump will keep relying on executive action. Over the past two years, market volatility has largely focused on executive decisions, and this is unlikely to change. Entering his final two years, he may lean even harder into executive moves to cement his legacy. With Congress likely to remain gridlocked outside a major Democratic sweep, expect greater focus on areas where congressional approval is not needed, including trade and foreign policy. Impeachment proceedings against the president are unlikely to gain steam, even in a Democratic sweep, given a lack of support from party leaders and insufficient Senate seats.