US midterm elections promise political uncertainty but economic stability

On November 3rd, all seats in the US House of Representatives are up for election alongside one third of the US Senate and a number of state governorships. In a recent Natixis CIB webinar moderated by economist Selin Aker, our experts weighed in on the likely outcomes of the elections and their potential implications for financial markets. We heard from Christopher Hodge, Chief US Economist, John Briggs, Head of US Rates Strategy and Benito Berber, Chief Economist for the Americas.

The Democratic Party is benefitting from President Trump’s unpopularity – driven largely by concerns over the cost of living – and looks on course to win the House of Representatives off the back of strong voter enthusiasm.

Our baseline forecast is that the Democrats will pick up 225 seats, with their ceiling being around 235. However, we will not know the exact numbers the day after the election as vote counting in some states can take considerable time. Insofar as markets react, they tend to move immediately, pricing in the most likely outcome rather than the exact one.

The race for the US Senate will be far closer, though. There are about nine close seats to watch on the night, and the Democrats will need to flip four in order to gain control. While betting markets suggest that there’s a strong chance of this happening, we assess the chances as closer to 50-50. The Republican Party has historically tended to outperform polling expectations, and many of the states being hotly contested are ones that have not been typically polled very closely.

We expect the Democrats to hold between 47 and 54 seats after the election, with the most probable outcome falling somewhere in between. However, a number of Senators on both sides have historically voted independently of their party, suggesting that neither party is likely to benefit from a truly unified caucus.

A divided government, where Democrats control either house of Congress while the Republicans retain the White House, will certainly limit major legislation, but the impact on the economy will be muted. Major policy priorities such as trade, immigration and foreign policy have been largely delegated to the President over the years. We could, however, expect an increase in Congressional investigations into the Trump administration.

In terms of fiscal policy, both sides will have to agree to avoid a government shutdown and increase the debt ceiling – which gives Democrats some leverage to reintroduce healthcare subsidies cut by the Trump administration. This could be a relatively minor positive stimulus to economic growth.

The rapid AI build-out has crowded out demand for capital, pushing real yields higher. Issuance from hyperscalers alone has reached US$250bn in 10-year equivalents this year. In 2027, it’s expected to jump to US$400bn, equivalent to 83% of the 10-year notes issued by the government in a given year.

Indeed, yields are now back to where they were at the peaks of the 2000s, but they cannot continue rising forever. We see a bipartisan scepticism towards AI and data centre investment which is only going to continue gathering momentum, and that will create some headwinds.

On the federal side, no matter the outcome of the mid-terms, there will not be a major push for additional regulation to slow data centre investment until at least 2028. But Democratic-led initiatives at state and local levels could constrain the pace of development. Over the long term, this could be supportive of rates by easing competition for capital.

Meanwhile, the election is unlikely to have a large impact on US Treasuries, and we expect yields to gradually decline after election day. Even if the Democrats perform at the top end of expectations, a sharp fall in appears unlikely, although the balance of risks would be towards lower yields.

Of course, American elections have impacts far beyond its borders, not least for the US’ closest neighbours. In recent months, we have seen that the Trump administration is willing to lower sectoral tariffs for Mexico and Canada on automotives, steel and aluminium among other products. Under this arrangement, Mexico and Canada will have the lowest tariffs in the world. It’s unclear whether the Democrats obtaining control of Congress would affect this development.

More broadly, US presidents tend to focus more on foreign affairs in their second term, especially after their last mid-terms. President Trump could turn his focus on the Shield of the Americas. The programme’s primary focus is security, but it also has a component related to investment screening, so Chinese investment into Latin America could be deterred.

The midterm elections could reshape the political balance in Washington DC. But a divided government would limit the scope for major legislative changes, while the White House would retain considerable influence over trade and foreign policy. Markets are therefore unlikely to react dramatically to the result, with the outlook for Treasury yields remaining more closely tied to economic fundamentals and the scale of AI investment. Beyond the immediate market implications, the elections will also set the stage for the 2028 presidential campaign, with potentially more far-reaching consequences for US economic policy.