US Midterms 2026: Democrats Take Control of Congress

Steven Chiavarone, CFA
Senior Vice President, Chief Investment Officer, Global Equities

Deborah A. Cunningham, CFA
Executive Vice President, Chief Investment Officer Global Liquidity Markets, Senior Portfolio Manager

RJ Gallo, CFA
Senior Vice President, Chief Investment Officer, Global Fixed Income, Senior Portfolio Manager

The Democrats have taken control of Congress. What does this mean for investors? Our equity, fixed-income and liquidity CIOs weigh in.

Steven Chiavarone, Chief Investment Officer, Global Equities

Prior to the US midterm elections, we felt that only two outcomes could meaningfully change monetary and fiscal policy: a GOP sweep creating wider voting margins or a Democratic blue wave large enough to produce filibuster- and veto-proof majorities. While the Democrats have retaken both chambers of Congress, it appears not by enough to create the latter scenario.

In the coming weeks, the stock market may experience volatility, but we think it should ultimately rise. Historically, the 12 months following midterm elections have been good for US equities. In fact, it has been 88 years since the S&P 500 last posted a negative return in that period, with an average of 14%. Why? One explanation is that the poor result of the president’s party motivates it to champion economic policies that improve its chance of victory in the next presidential election. Another is that a divided government hinders the sort of drastic legislation that can unsettle investors, though this election outcome actually raises the odds of modestly stimulative policy passing.

While the present uncertainty and changing of the guard might make investors anxious, no US midterm election has ended the world, and this one will not either. We are looking past the noise, focusing on the real opportunities due to strong economic growth, significant infrastructure buildout and what may be the earnings cycle of our lifetime.

Deborah Cunningham, Chief Investment Officer, Global Liquidity Markets

Democrats pulled off a double victory in the US midterm elections that few saw coming at the onset of the year. The blue wave means the federal government is sure to be divided on most issues. That typically creates a blockade against new legislation — an environment which broad financial markets traditionally view favorably as variables decrease.

But liquidity investors are different: they primarily look to the US Federal Reserve headquarters further down the National Mall from the Capitol for guidance – and its perspective is unlikely to have changed. The Fed might have wanted to hike rates in October due to stubbornly high inflation, but that policy-setting meeting may have been too close to the election. (Market sentiment has it that Fed officials traditionally have avoided rate moves in those periods to avoid seeming biased to a political party.) That stance, and officials penciling one more increase in 2026 in their September Summary of Economic Projections, could mean a quarter-point hike in December. That would raise the fed funds target range to 4.00-4.25%.

That scenario would be music to the ears of cash investors, as the yields of most liquidity products have the potential to rise in concert with Fed hikes. And additional tightening in 2027 is likely. Why? Due to the lag between policy moves and their impact on the broad economy, inflation might not decline for several quarters. Also, the Fed tends to adjust policy in cycles rather than intermittently. But even if rates stay at present levels, industry liquidity offerings should, we believe, remain attractive.

RJ Gallo, Chief Investment Officer, Global Fixed Income

One of the key outcomes of a blue wave across the House and Senate is a likely challenge to the unfettered expansion of AI – and we believe both houses may now look to restrain and regulate AI at the federal level. There will also be more sympathetic Democrats at the state level, amplifying any dampening effect.

Risk assets in general are already seeing cracks amid doubts about the returns on investment from massive AI capital expenditures. If federal and some state governments become less accommodating to the data center build-out, that could slow the stimulative effect on growth and profits. At the same time, restraining AI expansion could be friendly for bonds, if economic growth and inflation slow moderately. Lastly, we expect that Democratic control of both houses of Congress should constrain federal policy going forward and prevent any White House-led fiscal expansion, although the fiscal outcome is somewhat countered by the risk that Democrats push for reinstatement of planned Medicaid spending cuts.

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