U.S. Midterms 2026: Economic and Market Implications

In this article

1. U.S. macroeconomic backdrop
2. Macroeconomic and earnings outlook
3. Election scenarios and their implications
4. Investment implications – opportunities may vary but durable economic trends provide an anchor
5. Conclusion

The U.S. midterm elections on 3 November could reshape President Trump’s ability to advance his economic agenda. For investors, the key question is how the outcome could affect fiscal policy, inflation, corporate earnings and borrowing costs against a backdrop of elevated energy prices and substantial government borrowing.

Republicans currently control both chambers of Congress, holding 218 seats in the House of Representatives against 214 Democrats, with one independent and two vacancies. In the Senate, Republicans hold 53 seats, compared with 45 Democrats and two independents who caucus with them. With all 435 House seats and 35 Senate seats (including 2 special elections) being contested, the elections could significantly alter the balance of legislative power. The narrow Republican majority in the House leaves control of the chamber sensitive to relatively small electoral shifts, while the Senate's composition presents a different set of electoral and legislative constraints.

The parties' broad priorities indicate where negotiations may diverge. Existing laws, presidential powers and congressional voting requirements determine how far those preferences can translate into policy.

(Source: The American Presidency Project, 19 August 2024, and Intrasia Wealth comparative summary)

U.S. macroeconomic backdrop

The U.S. economy approaches the midterms with resilient demand but continued pressure on household finances. Real GDP grew at an annualised 3.4% in Q3 2026, following 2.2% in Q2, according to the U.S. Bureau of Economic Analysis’s advance estimate released on 29 October 2026. Growth was supported by investment, consumer spending and government expenditure, partly offset by falling exports and rising imports. Consumer spending and private fixed investment together expanded at an annualised 4.9%, indicating continued strength in underlying domestic demand. Business fixed investment increased at an annualised 12.7%, with investment in information-processing equipment rising 37.4%, software 9.6%, and research and development 7.5%. This is consistent with the ongoing AI infrastructure buildout, which is supporting demand for computing equipment and software.

(Source: U.S. Bureau of Economic Analysis, via FRED; Q3 2026 advance estimates, released 29 October 2026)

September headline inflation increased to 3.7% from 3.4% in August. A 9.1% monthly rise in gasoline prices accounted for more than half of the monthly CPI increase, highlighting the economy’s exposure to energy supply disruptions. Hiring slowed to 29,000 from 133,000, while unemployment edged up to 4.2%, matching the Federal Reserve’s September median longer-run estimate. Employment remains supportive of consumption, although the 0.7% annual decline in real hourly earnings points to pressure on discretionary spending.

(Source: BLS, Employment Situation, September 2026, 2 October 2026; Consumer Price Index, September 2026, and Real Earnings, September 2026, 14 October 2026; Federal Reserve, Summary of Economic Projections, 16 September 2026)

Fiscal constraints remain significant. The Congressional Budget Office estimated a $2.0 trillion deficit for fiscal 2026, while its February baseline projected federal debt held by the public reaching 120% of GDP by 2036. Constraints on new stimulus would therefore leave substantial existing borrowing requirements.

(Source: Congressional Budget Office, 8 October 2026; The Budget and Economic Outlook: 2026 to 2036, 11 February 2026)

Macroeconomic and earnings outlook

The macro-outlook combines continued expansion with gradual disinflation and broadly stable employment, subject to the Middle East conflict and economic developments. The IMF projects full year GDP growth of 2.3% in both 2026 and 2027, supported by consumption amid resilient demand, fiscal policy and sustained technology investment.

(Source: IMF World Economic Outlook, 13 October 2026)

Inflation is expected to moderate gradually, with the IMF forecasting annual-average consumer-price inflation of 3.6% in 2026 and 2.8% in 2027. Disinflation is expected as conflict-related and tariff effects dissipate. The San Francisco Fed’s October staff outlook projects PCE inflation to reach 2.0% by the end of 2028, owing partly to the stickiness of services inflation. However, these adjustments remain vulnerable to renewed supply disruptions. The implication is a potentially uneven decline in inflation, with limited grounds to assume rapid monetary easing.

(Source: IMF World Economic Outlook, 13 October 2026, and Federal Reserve Bank of San Francisco, 15 October 2026)

With regards to the labour market, the IMF projects unemployment of 4.2% in 2026 and 4.0% in 2027, consistent with continued economic expansion. Modest employment growth can coexist with low unemployment when labour supply and demand remain balanced. However, sustained pressure on household purchasing power or weaker investment could eventually translate into reduced hiring.

(Source: IMF World Economic Outlook, 13 October 2026)

Continued growth and stable employment should support corporate earnings, while disinflation could ease costs and improve purchasing power. Consensus forecasts project S&P 500 earnings growth of 16.0% in 2027 and revenue growth of 9.5%. AI investment and expanding cloud revenues should support technology and infrastructure suppliers. However, heavy capital spending can constrain free cash flow, while depreciation and refinancing costs weigh on profitability. Persistent energy inflation could also squeeze consumer spending and margins.

(Source: FactSet, Earnings Insight, 23 October 2026)

The midterms could reshape taxation, spending and regulation, creating opportunities and risks for selected sectors without necessarily changing that broader economic trajectory.

Election scenarios and their implications

As at 28 October 2026, Kalshi, a U.S. prediction-market exchange regulated by the Commodity Futures Trading Commission, implied a 91% probability of a Democratic House victory, making Republican retention a larger surprise. However, political probabilities do not establish how fully policy consequences are priced into assets. Sustained repricing would depend on revisions to expected cash flows, interest rates or risk premiums, which can occur before legislation is enacted.

(Source: Kalshi, 28 October 2026)

According to FactSet, the S&P 500 traded at 18.7 times forward earnings as of 23 October 2026, below its five-year average of 19.8 times and ten-year average of 19.1 times. Similarly, the MSCI USA traded at 19.5 times forward earnings as of 30 September 2026, below its trailing price to earnings (“P/E”) ratio of 25.2x. In terms of book value, the MSCI USA traded at a forward price to book (“P/B”) ratio of 4.7x compared to its trailing P/B ratio of 5.6x. Sector valuations differed materially.

(Source: FactSet, 23 October 2026, and MSCI Monthly Equity Insights report, 30 September 2026)

(Source: MSCI Monthly Equity Insights Report, 30 September 2026, and DWS Investments UK Ltd, September 2026)

Lower forward multiples offer limited reassurance if earnings forecasts fail to withstand elevated energy and financing costs. Energy’s lower P/E could reflect profits temporarily boosted by high oil prices, leaving apparently cheap shares vulnerable as earnings normalise. Utilities face a different test: rising electricity demand creates value only where investment returns exceed funding costs. AI-related valuations may already reflect expectations of continued investment growth, leaving some companies sensitive to disappointing earnings or cash flows. Suppliers depend on sustained orders, while developers must generate returns that justify capital expenditure and financing costs, particularly where spending exceeds cash generation and increases reliance on debt.

The implication is that post-election tax relief or faster permitting would justify higher valuations only to the extent that their benefits exceed existing expectations and associated financing pressures. More investment can support economic growth without necessarily improving shareholder returns.

Scenario 1 – Republicans retain both chambers

Continued Republican control would preserve the clearest route to further tax and spending legislation. With substantial investment incentives already enacted in 2025, the economic impact would depend on whether additional measures generate productive investment and how they are financed.

• Further tax relief could support household spending and business investment, although its effectiveness would depend on how benefits are distributed and whether it expands productive capacity rather than subsidising existing investment plans.
• Deregulation and faster approvals for energy and infrastructure projects could lower compliance costs and encourage investment, with implementation dependent on federal agencies and state and local authorities.

Market implications

Equities: A surprise result could initially support financials, energy and industrials through expectations of tax relief, deregulation and faster permitting. Lasting gains would require stronger after-tax profits or project returns. Banks would remain exposed to funding costs and credit losses; infrastructure suppliers would need investment demand to translate into cash generation and durable earnings. With activity already resilient, further stimulus could also prolong inflation and raise discount rates, offsetting some earnings benefits.

Fixed income: Additional deficit-financed stimulus could initially lift Treasury yields if demand strengthens before productive capacity expands, increasing inflation pressure and anticipated issuance. Persistent weakness would depend on the eventual fiscal package and investor demand for government debt. Stronger corporate earnings could support credit spreads, although spread tightening might not offset losses from rising Treasury yields.

The US dollar could initially strengthen if investors raise US growth and interest-rate expectations relative to other economies. Lasting support would require sustained relative growth or higher real returns. A rise in nominal yields driven mainly by inflation or fiscal concerns would provide less support to the dollar.

Commodities: Middle East supply disruptions would remain more important for near-term oil prices than permitting announcements. Easier approvals could expand production over the long term, but lower oil prices could partly offset producers’ volume gains while benefiting transport, manufacturing and household purchasing power. Gold could face pressure from higher real yields and dollar strength, although geopolitical uncertainty could sustain demand.

Scenario 2 – Democrats win the House; Republicans retain the Senate

A Democratic House would require bipartisan agreement for new tax and spending legislation, including measures pursued through budget reconciliation. Existing tax law would remain in place unless amended, while Republican Senate control would preserve a more favourable route for presidential appointments.

• Reduced scope for additional stimulus would not itself constitute fiscal tightening, as existing spending commitments would largely continue.
• Greater House scrutiny could challenge tariffs and regulatory decisions without automatically reversing them, given the administration’s continuing powers under existing laws.

Market implications

Equities: An anticipated House result could produce a limited initial response, although Senate results and voting margins would still matter. Earnings delivery would remain central, and financial-sector deregulation could continue through executive agencies. Utilities could benefit from electricity demand, but their investment requirements and real estate refinancing needs would leave cash flows sensitive to borrowing costs.

Fixed income: Reduced expectations for additional stimulus could initially support Treasuries. A sustained rally would require clearer disinflation, weaker activity or improved borrowing projections. Existing commitments would preserve substantial issuance, while appropriations disputes could disrupt contractors and federal services. Debt-ceiling confrontations would pose separate risks to payment confidence.

The US dollar could initially weaken if investors expect legislative gridlock to curb fiscal expansion and reduce upward pressure on US interest rates. However, resilient demand and persistent inflation could keep rates elevated. Sustained dollar weakness would therefore require a meaningful narrowing of the US yield advantage over other economies.

Commodities: Congressional division would have limited immediate influence on oil supply, leaving geopolitical disruptions and global demand central. Gold would benefit if nominal yields fell sufficiently to reduce real yields; disinflation alone would not guarantee that outcome.

Scenario 3 – Democratic sweep; Democrats win both chambers

Democratic control would strengthen congressional oversight, but presidential veto powers would constrain major legislative reversals. Most ordinary legislation would also face the Senate’s 60-vote threshold to overcome a filibuster; qualifying reconciliation measures could bypass that hurdle, but not a presidential veto.

• Democrats could seek negotiated changes to Medicaid and food-assistance restrictions enacted in 2025, potentially supporting household finances and consumption, depending on the measures agreed and their funding.
• Opposition to further tax cuts and protection of social spending could reshape fiscal priorities, although smaller deficits would depend on the overall revenue and spending balance.
• Senate control would allow Democrats to delay or reject nominees requiring confirmation, potentially slowing leadership changes without overturning existing rules.
• Greater scrutiny of data-centre electricity costs could also influence infrastructure investment, alongside continued state and local regulatory authority.

Market implications

• Equities: Healthcare providers and Medicaid-focused insurers could initially benefit from expectations that funding cuts will be softened or delayed. Sustained gains would depend on enacted funding, margins and valuations. Financials and AI-related companies could face greater scrutiny, but existing tax incentives and agency-led deregulation would not automatically reverse.
• Fixed income: Reduced prospects for further tax cuts could initially support Treasuries. However, spending compromises could widen deficits, sustaining substantial borrowing requirements. With inflation elevated, this limits the case for a sustained rally in longer-duration bonds, keeping yields elevated. Funding protection could improve the credit outlook for selected healthcare-related issuers, creating opportunities distinct from the broader Treasury market.
• Reduced expectations for further fiscal expansion could initially weigh on the US dollar. However, continued investment, existing tax incentives and resilient demand could preserve support for US growth and interest rates. Lasting currency weakness would depend on a narrowing of the US yield advantage or weaker investment inflows.
• Commodities: Democrats could push to restore clean-energy incentives, but this would depend on agreement with the White House, limiting immediate changes to energy investment. Gold could attract demand during fiscal disputes, but elevated yields could offset that support.

Investment implications – opportunities may vary but durable economic trends provide an anchor

Equity opportunities and valuation. Resilient demand and broadening profit growth support equity exposure, but strong earnings alone do not establish attractive prospective returns. Alongside P/E and P/B, normalised profitability, free-cash-flow yields and balance-sheet strength help assess whether valuations can withstand weaker margins or higher financing costs. Post-election beneficiaries offer a stronger investment case where enacted measures improve cash flows beyond existing expectations. However, deficit-financed tax relief could simultaneously lift earnings and raise discount rates, limiting the scope for valuation expansion.

Fixed income and duration. Persistent inflation and substantial borrowing requirements strengthen the case for earning income through short- and intermediate-maturity, high-quality bonds. These offer lower interest-rate sensitivity, although shorter maturities create greater reinvestment risk if rates fall. Congressional gridlock would not remove existing financing needs, while post-election spending compromises could add to issuance. Longer-duration Treasuries retain a role as protection against weakening demand accompanied by disinflation; their protection is less dependable when energy shocks or fiscal concerns drive yields higher. Duration exposure therefore depends on the source of economic weakness, not simply the expectation of slower growth.

AI concentration and earnings quality. Exposure across technology, industrials, utilities and credit can conceal dependence on the same hyperscaler investment budgets. Overseas semiconductor and equipment holdings may therefore broaden geographic exposure without materially diversifying the underlying demand risk. Faster permitting could accelerate this shared investment cycle while leaving customer concentration unchanged. Portfolio resilience depends partly on earnings streams less sensitive to infrastructure spending, including businesses converting AI adoption into productivity gains. Within the buildout, internally generated funding and credible investment returns provide greater flexibility if borrowing costs rise or customers delay projects.

Commodities and diversification. Energy and industrial metals offer exposure to supply constraints and demand from electrification and infrastructure investment. Election-related changes to permitting, trade and incentives could influence supply and project timing, while geopolitics remains important for energy prices. Commodity exposure may broaden portfolio return drivers, although metals tied to the AI buildout can reinforce existing investment-cycle exposure.

Conclusion

The midterms could trigger short-term repricing and shifts in sector leadership, while resilient demand and technology investment continue to support the broader outlook. Longer-term effects will depend on whether enacted policies strengthen earnings and productive capacity sufficiently to offset financing costs and fiscal risks. For investors, opportunities may emerge where these policy changes reinforce durable business growth and deliver benefits not already reflected in market prices.

This article is general market commentary, not investment advice or a personal recommendation. The value of investments can fall as well as rise, and past performance is not a guide to future returns. Written and reviewed under our editorial standards.