DoubleLine Initial Thoughts on U.S. Midterm Elections

Bill Campbell
Portfolio Manager

It is too early to judge the full implications of such a significant shift in the balance of power in Washington, and we are cautious not to extrapolate too much from day-after market moves as an indicator of longer-run performance. With so many new faces in Congress, statehouses and governor’s mansions, markets will need weeks or months to work out the impact.

Key Takeaways

• Results: Democrats swept both chambers of Congress. Markets are reading the result as gridlock: U.S. Treasuries rallied, led by the belly of the curve; the U.S. dollar weakened; and oil sold off.
• DoubleLine View: We are cautious about extrapolating from day-after moves. Gridlock does not necessarily mean less fiscal stimulus, and the real policy fights move to 2027. Tariffs are likely to stay and could expand, the Iran war remains a key swing factor for energy and inflation, and state-level pushback on data centers is a new variable for growth and credit supply.
• Positioning: Broadly unchanged. We see more support for our weaker-dollar view, and our Corporate Credit team has turned slightly more constructive on investment grade (IG) corporate credit.

Election Results and Initial Market Reaction

Democrats swept both the House and Senate, picking up at least seven Republican-held Senate seats in Kansas, Iowa, Texas, Ohio, Maine, North Carolina and South Carolina. A Democratic House was largely expected, while the flip of the Senate, and the margin, surprised to the upside. The result is widely seen as a verdict on the president, whose approval stood at historically low levels going into the vote. The cost of living, the Iran war and higher gasoline prices weighed heavily on voters. President Donald Trump struck a surprisingly conciliatory tone on Election Night, telling The New York Times he was “absolutely willing” to accept the outcome and to work with the incoming Democratic majorities.

Markets are reading the outcome as policy gridlock, meaning less fiscal stimulus and, therefore, a lower term premium. Nov. 4 reactions included:

• Treasuries: A rally across the curve, led by the belly. The 10-year yield closed about 5 basis points (bps) lower near 4.90% after touching 4.89% overnight, while two- and 30-year yields each fell about 3.5 bps.
• Dollar: Fell the most in two months, losing ground against every G-10 currency. The “U.S. exceptionalism” narrative is under pressure, partly on worries that tougher AI regulation could slow U.S. growth.
• Equities: More resilient than overnight price action implied. Nasdaq 100 futures fell as much as 2.4% overnight, but the S&P 500 Index closed up 1.6%, its best day since August. Some hyperscalers were boosted by the expectations for lower spending, while capital expenditure (capex) beneficiaries lagged, such as semiconductor makers and data-center cooling providers.
• Oil: Brent settled 8.7% lower at $94.62, suggesting the market expects an earlier end to the Iran war. Washington and Tehran are weighing new mediator proposals, but we are skeptical a deal will come quickly.

What DoubleLine Is Watching

• Lame duck and government funding. Republicans keep full control of Congress until Jan. 3 and can confirm nominees or, in theory, pass a party-line reconciliation bill; everything else would need 60 Senate votes. Cabinet changes are possible. The September stop-gap funding measure expires Dec. 11, and only three of 12 fiscal year 2027 appropriations bills have passed the House; none has passed the Senate. The likely outcome is another short-term continuing resolution, whose first quarter expiry would give Democrats their first funding-deadline leverage on tariffs and the Iran war. We would push back on the knee-jerk view that gridlock lowers the term premium: A full-year funding bill could require giveaways to both sides, such as a rollback of the Medicaid cuts in the One Big Beautiful Bill Act or more defense spending, re-entrenching fiscal issues rather than easing them.
• Iran, energy and the Fed. The oil sell-off is a speculative bet on a Middle East resolution. With less sway at home, the president might lean more on executive action abroad, and renewed escalation with Iran remains a risk. The Federal Reserve’s hike this year was driven largely by the Iran war and its effect on energy prices. If energy prices moderate, some of that pressure eases; if the conflict re-escalates, it returns. With the administration’s perceived ability to pressure the Fed much diminished, the Fed might be less timid on inflation, with the prices-paid components of purchasing managers’ indices still elevated.
• Debt limit. Debt stood at $40.33 trillion on Oct. 26, about $773 billion below the $41.1 trillion ceiling; at roughly $200 billion a month of borrowing, headroom could run out early next year, triggering extraordinary measures. If the outgoing majority does not address it in the lame-duck period, it could become a second 2027 pressure point, with implications for T-bill supply and Treasury General Account dynamics.
• Tariffs. We expect tariffs to remain in place, and likely expand, in 2027. Since July 24, 2026, imports from 60 economies have faced Section 301 duties of either 10% or 12.5%, replacing the International Emergency Economic Powers Act (IEEPA) tariffs the Supreme Court struck down. Because they rest on delegated executive authority, a Democratic Congress cannot unwind them without legislation that survives a veto. A separate Office of the U.S. Trade Representative overcapacity probe is under way, and the year-end G-20 Leaders’ Summit is a potential venue for new Section 301 action. Some on our team see tariffs as past peak, with room for bipartisan relief, such as for Canada.
• Data centers. Democrats won the governorships in Texas, Ohio and Georgia, each a key market for data center development, and several new governors ran on anti-data-center platforms. In Texas, home to more than a quarter of U.S. data center capacity planned through 2030, Governor-elect Gina Hinojosa campaigned on halting new construction. State executive action is a real risk to permitting and energization timelines. By Goldman Sachs’ estimate, near-term state and local moratoriums could hit around 45% of planned U.S. data center expansion. Any resulting U.S. equity contraction would likely be dollar negative, adding to pressure on the “U.S. exceptionalism” trade. This is not all bad: If capex is dialed back, hyperscalers could see better free cash flow and lower funding needs, which would matter for IG supply. After something of a frenzy, we would view a slower pace as credit positive.

DoubleLine Positioning

For now, we are taking a wait-and-see approach: The election has not changed our broad positioning. Looking ahead, we are focused on the intersection of inflation, energy and AI, and on the first quarter funding and debt-limit deadlines, when the new Congress could first gain leverage. We will continue to monitor our positioning as the new Congress, statehouses and governors set their agendas.

DoubleLine invests with our 12- to 24-month economic outlook in mind, and in a late-cycle environment, we continue to emphasize quality, selectivity and optionality. Below are DoubleLine’s key macroeconomic and positioning views:

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