US midterms 2026: What’s at stake for markets?

American voters will decide who controls Congress in November. They will have less say over the constraints facing it. Whoever wins will inherit large deficits, costly borrowing and an economy increasingly reliant on the AI investment boom.

A Democratic victory could complicate President Donald Trump’s agenda and test investors’ confidence in that boom. But neither party offers an obvious remedy for America’s strained finances.

Investec’s investment and economics experts examine where a change in political control could matter most, from battles over spending to the outlook for equities and bonds.

Contributors:

• Chris Holdsworth, Global Chief Investment Officer, Investec Investment Management, South Africa
• Philip Shaw, Chief Economist, Investec UK
• Will Ridge, Head of Equities and co-head of the institutional segment, Investec Corporate & Investment Banking, South Africa
• Annelise Peers, Chief Investment Officer, Investec Switzerland

Chris Holdsworth: Following the money on the midterms

Much has been written about the virtues and risks of prediction markets. For all their faults, they give us a continuous money-weighted opinion on a range of topics that we would only have been able to use pundit opinions and polls for before. 

Polymarket prices on 12 October implied that there was a 64% chance that the Democratic Party takes the Senate and a 91% chance that they take the House too.  A 64% chance is far from a slam dunk, but at this point the weight of money is pointing to Democratic Party control of both chambers of Congress. The timely estimate of probabilities allows us to measure in real time the impact of global events on the elections.

As an example, the odds of a Democratic majority in the House increased as the price of gasoline and diesel in the US ramped up.

Rising fuel prices provide a plausible political explanation for President Trump’s efforts to lower diesel costs. We can expect many more of these sorts of results from prediction markets even if correlation does not imply causation.

While a powerful tool for estimating the likelihood of events, they come with the risks of any sort of gambling. In April, Brazil moved to restrict prediction-market platforms, citing gambling-related risks.

Prediction markets allow for powerful insights and the ability to hedge against any number of risks, where liquidity allows, but at the cost of opening another avenue for gamblers.  One insight is that the midterms will likely go the Democrats’ way at this point.

Philip Shaw: Could defence be a battleground in fiscal policy?

A shift in control of Congress would have consequences for fiscal policy. The beginning of Trump 2.0 in 2025 was marked by the passing of the One Big Beautiful Bill Act, which contained a number of tax reductions together with changes to expenditure, at an estimated cost of $4.2trn over 10 years.

There seem to be few intentions to pass a further blockbuster fiscal package over the next two years. Even so, if the Democrats recapture one or both chambers of Congress, as we expect, current disagreements over spending, often a typical feature of the landscape in Washington, look set to intensify.

Congress has so far failed to agree on spending bills for the new 2026/27 fiscal year, resulting in the need for stopgap legislation, known as Continuing Resolutions. These fund all 12 areas of government spending at last year's levels until 11 December, at which point financing ceases.

An inability to reach an accord on permanent funding via 'Appropriations Bills' would require the can to be kicked further down the road, via further Continuing Resolutions, to prevent government from shutting down.

Democratic control of the Senate or the House would undoubtedly deepen the disagreements once the new Congress convenes in early January.

Even if the Appropriations Bills are all passed before then, the stage would still be set for more fiscal battles further down the road. A separate stand-off on a separate defence bill, including funding for the so-called 'Golden Dome', is one such area. 

A change in political control in Congress is unlikely to have a major soothing impact on the US's poor fiscal metrics. The budget deficit reached $2trn last year, some 6% of GDP, with outstanding debt very close to 100% of GDP.

Looking ahead, the non-partisan Congressional Budget Office forecasts the debt to GDP ratio climbing to 120% in 2036. A Democratic victory might curb the extent of some of the Republicans' programmes, particularly on defence, but potentially at the cost of their own additional demands in areas such as welfare. Hence the results of the midterms could turn up the fiscal heat in Congress but would do little to alleviate the wider longer-term fiscal pressures.

Will Ridge: Could a blue wave test the AI rally?

For equity investors, a Democratic sweep would raise questions beyond government spending. Prediction markets strongly favour the Democrats taking the House and give them a narrower edge in the Senate. While election forecasts should be treated with caution, a “blue wave” could have implications on the equity and bond market.

Estimates vary, but a generational AI capex cycle has been an outsized contributor to US GDP growth in 2026, and US equity markets are increasingly a one-way bet on the durability of this theme.

Recent quarterly results allayed market concerns on the return on this investment. Hyperscalers like Microsoft, Google and Amazon noted spectacular growth in their cloud businesses and raised capex guidance as a result. Revenue trends at the two largest consumers of tokens (OpenAI and Anthropic) remain equally comforting.

So, what could go wrong? The key bottlenecks to this capex cycle remain power generation, permissioning rights to build data centres and public perception. This is where the rubber hits the road into mid-terms. The Democrats have erred more on the side of AI regulation “doomerism”. “It’s going to take your jobs, drive up electricity prices and consume all your water etc.” It’s a message that resonates to a disenfranchised “main street” that feels the impact of higher inflation and fuel prices and doesn’t benefit from the fact that the S&P is trading at all-time highs.

This narrative received a major boost when previous Anthropic safety researcher Evan Hubinger posted that there’s a >10% chance that artificial intelligence could cause human extinction within a decade.

MAGA countered with the White House Accord on Super Intelligence that reinforced a commitment to internal controls, oversight and the external auditing of new model releases. This was signed by all the high-profile tech leaders.

Should the ‘blue wave’ materialise in November, the market will be forced to question the pace and durability of this AI capex cycle.

The US fiscal position has deteriorated substantially. This reflected in much higher bond yields. There seems to be little appetite from either side of the aisle to pull back on runaway government spend, but the spending plans presented by the emergent DSA faction within the Democratic party are concerning.

If the democrats sweep the midterms, there’s likely to be a further sell-off in US yields which is likely to compound the equity market pain.

Annelise Peers: Bond markets put Congress on notice

In most years, US midterm elections are relatively low-volatility events for financial markets, but not in 2026. The yield on the 10-year US Treasury has risen sharply, from around 4.60% a month ago to approximately 5.31%, taking it to levels last seen in the early 2000s.

The sell-off reflects a combination of renewed cost-push inflation, higher oil prices following the escalation of tensions in the Middle East, stronger-than-expected inflation data and mounting concern about the US fiscal trajectory.

Energy is the immediate catalyst, but the rise in real yields also suggests that investors are demanding a larger premium to finance persistent deficits and a growing debt burden. The bond market is therefore sending a clear message to the incoming Congress: further fiscal excess is likely to be punished through higher borrowing costs.

Whichever party prevails, the policy mix is unlikely to offer the bond market much reassurance.

A Democratic victory could bring higher taxes and tighter oversight of parts of the Republican agenda, but potentially also new spending demands. A Republican win would be more likely to preserve tax cuts and extend the use of tariffs, which could add to inflationary pressure. In either case, fiscal space is constrained, and the next Congress will face a much higher interest bill than its predecessors.

Bringing inflation down was one of President Trump’s central electoral promises, but the renewed squeeze on household purchasing power, from fuel, food and borrowing costs, has left that pledge unfulfilled.

This has become a material vulnerability for Republicans: current polling and election forecasts favour Democrats to regain the House, while the Senate remains more finely balanced.

At the same time, the front end of the yield curve is pricing a renewed Federal Reserve tightening cycle (a further 1% increase is priced into the outlook for the FED funds rate), reinforcing the message that neither monetary nor fiscal policy can ignore the inflationary consequences of higher energy prices, tariffs and deficit spending.