Probability of a "blue Congress" rises to about 72%! Midterm election "Senate suspense" affects AI trades, Treasury market wary of further fiscal expansion

As of pre-market on November 2 Beijing time, real-money betting data from prediction market Polymarket showed that the implied probability of the Democratic Party winning control of the House and Senate was approximately 95% and 73%, respectively; in the combined chamber market, the probability of Democrats controlling both chambers was about 72%, while Republicans holding the Senate and Democrats winning the House was about 23%. These quotes indicate that a Democratic recapture of the House is already a highly concentrated market expectation, while the Senate outcome still leaves greater room for surprise. The market impact of this U.S. midterm election centers on three questions: how far the election results deviate from existing expectations, whether AI data centers can be delivered on schedule, and whether fiscal policy further pushes up financing costs. The same election outcome could simultaneously improve the policy environment for AI companies while increasing supply pressure on long-term U.S. Treasuries, so stocks, bonds, and the dollar may not necessarily react in the same direction. U.S. midterm elections typically do not trigger violent financial market volatility. However, the results of the November 3 election could deepen investor concerns about AI spending and debt-ceiling negotiations; if Democrats tighten corporate scrutiny, the election results could also affect the U.S. corporate sector. Since Donald Trump returned to the White House in 2025 and Republicans simultaneously controlled both chambers of Congress, the S&P 500 has cumulatively risen about 27%, benefiting from massive capital expenditure in the AI sector and strong corporate earnings growth. However, U.S. Treasury yields have also risen significantly, especially after the U.S. and Israel attacked Iran in February. The attacks triggered a surge in energy prices, and that impact is now transmitting to other areas of the U.S. economy. Combined with an unprecedented wave of AI infrastructure-related debt issuance, yields on long-term U.S. Treasuries of 10 years and above have continued to sit near their highest levels in 24 years. **A "Blue House" Is Already the Mainstream Expectation; the Senate Outcome Determines the Incremental Shock** A "blue Congress" refers to Democrats controlling both the House and Senate. What Citigroup strategists emphasized in their "midterm election" strategy framework published on October 30 is precisely this expectation gapif Republicans unexpectedly hold the Senate, the market may reduce concerns about tighter regulation and future corporate tax increases, providing a rebound catalyst for financial stocks and some AI computing-theme and semiconductor core assets; if Democrats secure 53 or more seats, it could strengthen investors' judgment that they will continue to control the Senate in 2028 and further contest White House dominance, prompting the market to adjust in advance its expectations for future after-tax earnings growth of technology stocks. It is worth noting that "53 seats" is the scenario threshold Citigroup uses to observe political landscape and valuation changes, not the legal threshold for an immediate corporate tax rate increase. Even if Democrats control both chambers, tax law changes still need to go through the legislative process and face Trump's presidential veto power. Citigroup's official discussion also places corporate tax risk in the context of the 2028 political landscape shift, rather than treating it as a policy that would take effect immediately after the 2026 election. Therefore, a modest Democratic victory and a significant Democratic majority do not mean the same thing for the market; as pre-election expectations change, whether "53 seats or more" still constitutes a negative surprise also depends on how much the market has already priced in at that time. Republicans holding the Senate mainly means reduced policy constraints: they can still control Senate committees and the nomination confirmation process, but if Democrats win the House, they can still strengthen oversight through investigations and hearings. Regarding the Senate suspense's impact on the dollar and U.S. Treasuries, if Democrats win the House and Republicans hold the Senate, divided control of Congress could increase the risk of budget stalemates, government shutdowns, and debt-ceiling brinkmanship, affecting the U.S. Treasury risk premium; if the market lowers growth expectations as a result, the dollar could also come under pressure. If Republicans hold both chambers, further tax cuts or expanded defense spending could worsen deficit pressure and push up U.S. Treasury yields, supporting the dollar in the short term; longer-term fiscal concerns could weaken that support. **From Congressional Hearings to the Powering-Up Process of Large AI Server Rooms: How the Election Could Change AI Cash Flow** Investors are trying to assess how the election results will affect the market outlook. Current forecasts favor Democrats winning the House, while the ownership of Senate control is less clear. Ned Davis Research said that since 1930, there have been eight midterm elections in which the president's party lost control of the House, and in five of those the S&P 500 rose for the remainder of the year. From Election Day to year-end, the index's median gain in those years was 1.4%, slightly below the 1.9% median gain over the same period in all midterm election years. If Democrats win both chambers of Congress, investors expect AI to face stricter oversight, which could weigh on the market. Democrats would have the ability to launch investigations into the U.S. corporate sector while trying to slow the deregulatory process, which could increase market volatility. If Democrats win the House while Republicans hold the Senate, the impact on the U.S. fiscal position would be mixed. Investors say divided control of Congress raises the risk of government shutdowns and brinkmanship over the debt ceiling. This could further increase pressure on the U.S. sovereign credit rating, which is already under strain. Investors were already concerned about huge fiscal deficits and rising interest costs. Some strategists warn that spending compromises over defense spending and healthcare subsidies could further widen future fiscal deficits. If the market believes such policy disputes could drag down economic growth, the dollar could weaken as a result. If Republicans win both chambers of Congress, investors expect the White House could push for more tax reform or increase defense spending, further worsening an already massive fiscal deficit. However, the risk of new AI regulatory measures and congressional investigations would be lower. The market has begun pricing individed Congress, or a Democratic sweep. The biggest impact of a strong Democratic performance may fall on the AI-related trading frenzy: related investigations could further fuel growing public opposition to data center construction. Raymond James Washington policy analyst Ed Mills said in a report that investigations could accelerate the push for safety standards, independent evaluations, and incident reporting requirements for frontier AI models, and strengthen accountability for data center developers. Investors have been betting on the optimistic outlook for AI expansion, and any doubts about its rapid growth would trigger violent market swings. According to a Reuters/Ipsos poll, only one-third of Americans support the current rapid pace of data center construction. If Democrats win one or both chambers of Congress, they would gain powerful tools to investigate the industry and regulators. Reuters recently reported that Democrats are already preparing investigations into ties between Trump and his family and the cryptocurrency and prediction market industries. Ebury market analyst Diego Barnuevo said negotiations between a Democratic-controlled Congress and the White House could be largely limited to must-pass items such as the budget and the debt ceiling, with the debt ceiling issue expected to become a focus in 2027. "We believe the impact of a Democratic sweep on the fiscal outlook would be neutral to slightly positive," Barnuevo said. However, others are skeptical about whether Democrats would significantly strengthen fiscal restraint; they are equally pessimistic about whether any political outcome can substantially improve the deteriorating fiscal position. Ned Davis chief U.S. strategist Ed Clissold said a Democratic takeover of the House could modestly dampen the year-end rally in U.S. stocks, but overall such a scenario has not prevented stocks from rising. "The conventional wisdom is that political gridlock is good for the stock market," Clissold said. He added that stocks have performed better under Democratic presidents than under Republican presidents. Republicans winning both chambers of Congress could have a more significant impact on U.S. Treasuries, as it would extend policies that could further expand the fiscal deficit. "If this happens, it would support much of the fiscal policy agenda already advanced by Trump and U.S. Treasury Secretary Scott Bessent," said Joaquin Kritz Lara, chief economist and strategist at Numera Analytics. He said the Trump administration could then be inclined to push for more tax reform or significantly expand the defense budget, potentially further worsening the U.S. fiscal position. For the dollar, rising U.S. Treasury yields could initially provide support. "Republicans fully retaining congressional control could initially support the dollar through the yield channel, but would also be seen as a green light for more deficit-financed policies, continued pressure on institutions, and further foreign policy risk-takingfactors that could force investors to raise currency hedge ratios over a longer time horizon," said Karl Schamotta, chief market strategist at Toronto-based payments company Corpay. A strong Republican performance would ease market concerns about investigations into AI companies. JPMorgan strategists said in a recent report: "If Republicans maintain control of Congress, policy continuity, potential fiscal expansion, deregulation, and faster federal approvals could provide the most favorable incremental federal policy environment for AI and infrastructure construction." **AI Policy Tailwinds Do Not Necessarily Bring Capital Flow Tailwinds: Stocks, Bonds, and the Dollar Reassess the Fiscal Cost** Republicans holding both chambers could reduce new congressional investigation and regulatory pressure on AI companies, but could also open the door to further tax cuts and expanded defense spending. If the market therefore raises expectations for deficits and Treasury issuance, the term premium in long-term yields could rise. For AI assets, this creates two opposing forces: improved project approval and investment expectations, but pressure on benchmark financing costs and valuation discount rates, weakening the effect of some policy benefits. The dollar also shows divergence across time dimensions. As Corpay chief market strategist Karl Schamotta's view suggests, Republicans fully holding Congress could initially support the dollar through higher U.S. Treasury yields; but if the market subsequently becomes more concerned about deficit financing, institutional uncertainty, and foreign policy risks, overseas investors may increase currency hedge ratios on dollar assets, putting new pressure on the dollar. This means whether rising yields can continue to support the dollar also depends on whether they reflect improved growth or a rise in the risk compensation required to hold U.S. assets. Democrats winning one or both chambers could limit some new tax cuts and spending plans, but does not guarantee an improvement in the fiscal position. In budget negotiations, healthcare subsidies and defense spending could become bargaining chips; mandatory spending driven by an aging population will not disappear because Congress changes. Citigroup's official discussion therefore holds that without substantive bipartisan policy adjustments, deficit pressure may persist. The 2027 budget and debt-ceiling negotiations will remain an important window for investors to observe fiscal credibility. Congressional gridlock also does not mean Treasuries across all maturities will necessarily fall in sync. If political disputes weaken growth expectations, long-term Treasuries could attract safe-haven buying; short-term Treasuries near potential payment-risk windows could require higher yield compensation. The stock market also needs to distinguish between short-term sentiment and earnings changes: as Ned Davis Research statistics show, since 1930, in the eight cases where the president's party lost House control in a midterm election, the S&P 500 rose in five of them from voting day to year-end, with a median gain of 1.4%, slightly below the 1.9% over the same period in all midterm years. This supports the idea that "political change does not necessarily block the year-end rally," but does not support the idea that "divided Congress necessarily drives gains." For AI and semiconductor investment, what is most worth tracking after the election is how policy changes ultimately affect delivery dates, capital costs, and after-tax cash flow. Companies that have already secured power supply, have credible customer contracts, and can absorb construction delays are better positioned to convert demand into sustainable returns; companies that rely solely on expanded construction commitments to support valuations are more vulnerable to the dual impact of changes in policy and financing expectations.