Analysis:Investors gaming out Congress control for spending, AI outlook

The US midterm elections, set to take place on November 3, could have significant implications for investor sentiment, particularly in relation to AI spending and debt ceiling negotiations. Since the return of Donald Trump to the White House in 2025, the S&P 500 has gained about 27%, driven by extensive capital investment in AI and strong corporate earnings.

However, Treasury yields have also surged, particularly following the US and Israel's February attack on Iran, which led to a spike in energy prices and is now impacting various sectors of the US economy.

Polls suggest that Democrats are likely to win control of the House, while the outcome of the Senate remains uncertain. Historically, when the president's party loses control of the House in midterm elections, the S&P 500 tends to experience a modest increase in the period following the election. If Democrats manage to secure both chambers of Congress, they could impose stricter oversight on AI companies, potentially impacting market stability.

On the other hand, a divided government with Democrats controlling the House and Republicans retaining the Senate could result in mixed outcomes for the US fiscal situation, with heightened risks of government shutdowns and debt-limit crises.

Investors are closely monitoring these developments, as a Democratic sweep could provide the party with the tools to investigate various industries and regulators. The party has already signaled its intention to examine Trump's and his family's connections to the crypto and prediction market sectors. The outcome of the elections could also influence the fiscal outlook, with potential implications for the US dollar and interest rates.

While a Democratic takeover of Congress might temper the stock market's year-end rally, it is unlikely to significantly improve the deteriorating fiscal landscape.