Investors gaming out Congress control for spending, AI outlook

The US midterm elections on November 3 did not typically generate significant market fluctuations. However, the results may contribute to investor concerns about AI spending and debt ceiling negotiations, and potentially impact Corporate America if Democrats scrutinize companies. Since Donald Trump regained the White House in 2025 with full Republican control of Congress, the S&P 500 has risen by approximately 27%, driven by substantial capital spending on AI and robust earnings growth.

However, Treasury yields have also significantly increased, particularly after the US and Israel attacked Iran in February, causing energy prices to surge and affecting other parts of the US economy.

Investors are now assessing how the election outcomes will shape the market outlook. Forecasts suggest Democrats gaining control of the House, with the Senate outcome remaining uncertain. Historically, since 1930, eight midterm cycles saw the president's party losing the House, and the S&P 500 experienced five upward movements in the subsequent year, according to Ned Davis Research. The median gain was 1.4% from Election Day to year-end, slightly lower than the 1.9% across all post-Election Day midterm years.

If Democrats secure both chambers, investors anticipate stricter oversight of AI, which could negatively influence markets. Democrats would have the authority to investigate Corporate America while attempting to limit deregulation, potentially increasing market volatility. If Democrats control the House but Republicans retain the Senate, the impact on the US fiscal situation would be mixed.

Investors caution that a divided Congress increases the risk of government shutdowns and debt-limit brinkmanship, adding pressure to the US sovereign rating already burdened by large deficits and escalating interest costs.

Strategists warn that defense and healthcare subsidies could widen deficits over time, potentially dragging down the dollar if the market believes policy disputes may hinder growth. Conversely, a Republican sweep would likely result in more tax reform or increased defense spending, exacerbating the deficit. The risk of new AI regulation and congressional probes would, however, be relatively low under Republican control.

A strong Democratic showing could negatively affect the AI trade, potentially intensifying public opposition to data centers and accelerating efforts to establish safety standards, independent evaluations, and incident reporting for AI models. Investors have anticipated an optimistic outlook for AI expansion, and any doubt about its rapid growth could cause sharp market movements.

Despite a majority of Americans expressing disapproval of the fast pace of data-center construction, a Democratic win in one or both chambers would give the party significant tools to investigate industries and regulators. Democrats are reportedly preparing to probe Trump and his family's connections to the crypto and prediction market industries.

Negotiations between a Democratic-led Congress and the White House would likely focus on must-pass items such as the budget and the debt ceiling, expected to dominate fiscal discussions in 2027, according to Ed Barnuevo, a market analyst at Ebury.

While some analysts believe Democrats would be more restrained and mitigate fiscal deterioration, others doubt any political outcome would markedly improve the deteriorating fiscal picture. Ned Davis chief US strategist, Ed Clissold, suggests that a Democratic takeover of the House could slightly dampen the year-end rally in US equities, but generally, it has not hindered stock market advancements.

Conventional wisdom posits that gridlock benefits stocks, as Clissold notes, highlighting that stocks have performed better under Democratic presidents than Republicans.