A blue day for Trump

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What are the implications of the US mid-terms?

The US mid-term elections were expected to swing control of Congress to Democrats. The fact that this occurred was not a surprise. However, the magnitude of the Democrat victory was. So far, Democrats have flipped seven Senate seats, including in traditional Republican strongholds such as Kansas, Texas and South Carolina. Democrats currently hold 54 of the 100 Senate seats, with two races in Alaska and Mississippi still too close to call. 

In the House, Democrats have so far flipped 43 seats and current counts have them at 253 seats, well above the 218 required to control the House. The House result could also increase to 260 or just above, given 25 races are still too close to call. If this occurred, it would be the Democrats’ biggest House majority since the early 1990s. In fact, the Democrats’ House majority is already bigger than any Republican majority since the Great Depression.

What are the policy implications? 

While the results give the Democrats control of the legislative agenda, the fact that Trump still controls the White House will be a key constraint. In Trump’s words, he will be “Mr Veto.” The Democrat win is a long way from the 290 seats in the House and 67 in the Senate required for a veto-proof majority. This gridlock means that Democrats will struggle to pass major legislation over the coming two years.

Democratic control of Congress, however, will still give them significant leverage in upcoming budget negotiations. Government funding is set to expire on December 11, and the outgoing Congress is likely to agree to stopgap funding through to early 2027. At that point, the new Congress controlled by Democrats is likely to seek to reverse some of President Trump’s health care and clean energy cuts, setting up considerable political horse trading with Congressional Republicans and the White House. This points to a much more volatile fiscal environment over the coming two years, with another government shutdown a significant risk.

The debt ceiling debate will also come back onto the agenda in 2027, with Treasury likely to reach its X-date by late 2027. This will provide another bargaining point between Democrats and Republicans and could lead to wider deficits as both parties seek concessions.

Control of the Senate will also give Democrats the ability to approve or reject the President’s nominations for judges, senior executive branch positions and new members of the Federal Reserve. This will diminish the President’s power in Washington, likely shifting his focus towards areas he can shape through executive orders, including foreign policy, targeted tariffs and immigration.

The election result has also increased the odds that the US will push for a diplomatic solution to the war in the Middle East. Republicans have acknowledged that voter dissatisfaction with the war contributed to their defeat, increasing the domestic political incentive for President Trump to de-escalate the conflict. A Senate controlled by Democrats will increase pressure on the administration to end the war through greater oversight and control over funding.

Another policy shift following the mid-terms is likely to be greater scrutiny of AI and data-centre development, which emerged as an important issue for voters. While bipartisan support would be required at the federal level to overcome a presidential veto, Democratic victories in key gubernatorial races could also slow the pace of data-centre construction in some states.

How have markets reacted?

Financial markets have been particularly volatile following the election. Equity markets sold off sharply on concerns Democrats would slow the AI rollout, with the S&P 500 falling 4.4% on Thursday and the NASDAQ dropping 5.5%. Oil prices fell sharply given increased optimism around a resolution in the Middle East, with Brent crude futures falling from over US$117 per barrel at the end of October to just below US$100 per barrel currently. The drop in oil prices and the prospect of slower AI-related capex have added to the recent downward pressure on bond yields, with the US 10-year Treasury yield falling to around 4.85%, down from more than 5.3% a month ago.

Overall, the mid-term election result is unlikely to be a game changer for the US economic outlook given Trump’s continued control of the White House. But it does change the balance of risks. A de-escalation of the Iran war could lower oil prices and inflation, while greater scrutiny of AI and data-centre development could temper US investment growth. At the same time, divided government raises the prospect of greater fiscal brinkmanship over government funding and the debt ceiling. Ultimately, the next two years may prove more important for positioning ahead of the 2028 Presidential Election. A Democratic sweep in 2028, with the White House up for grabs, would have far more significant consequences for the economic outlook.