Democratic "blue wave" could hit US stocks? Political gridlock may limit policy shifts; US stocks may not be "doomed"

On the evening of November 3, US Eastern Time, a US election data analysis agency released a forecast stating that the Democratic Party will regain control of the US Senate. Earlier, the agency had predicted that the Democratic Party would retake control of the House of Representatives. This means that after these midterm elections, the Democratic Party will again control Congress. According to forecast information released by Decision Desk HQ (DDHQ), the Democratic Party will win 51 of the 100 Senate seats. According to the agency's earlier forecast, Democrats are expected to defeat Republicans in North Carolina, South Carolina, Texas, and Kansas to win Senate seats in these four key states. Some analysts believe that if Democrats win across the board, the US stock market could fall by more than 10%, the dollar could weaken, and international stock markets could outperform the US market. The core market concern is that once Democrats control Congress, they will impose stricter scrutiny on the tech industry and data center construction. Candidates from both parties have made data centers an election issue, further intensifying existing market doubts about the scale and returns of AI spending. Chris Weston, head of research at Pepperstone, pointed out: "The 'blue wave' may already have been partly priced in, but its scale forces the market to reassess risk. At present, the stock market bears the greatest burden of political uncertainty, and tech and AI are at the center of the adjustment." But economist James Foord takes a different view. He noted that a sweeping Democratic victory in the midterms would indeed change some things, but in practice the White House has the ability to severely limit what Congress can do. In fact, if one reviews historical performance under this specific political configuration, the results are better than most investors imagine. James Foord is focused on the broader market outlook, not just the next few months, specifically analyzing what changes will occur in the market landscape after the election ends, the results are announced, and the winners and losers are determined. Without veto power to suppress it, the impact of a sweeping Democratic victory is limited In 2020, when Democrats won the White House and controlled both chambers of Congress at the same time, the market quickly began pricing in expectations of tax increases and higher fiscal spending. But the situation now is different. US President Trump has veto power and has already said he will use it. Trump told the media on the 3rd that he was "absolutely willing to accept the election results and ready to work with Democrats; something may be reached." But Trump also said that if Democrats make progress in this election and win control of Congress, he may use the presidential veto to force Democrats to reach a bipartisan agreement with him. Overriding a presidential veto requires both chambers of Congress to pass the relevant bill by a two-thirds majority. Even with a sweeping Democratic victory, it is unlikely they will obtain such a large advantage. More importantly, a sweeping Democratic victory will limit the current administration's room to govern and make policy more prone to gridlock. In practical terms, corporate tax rates, tariff policy, and the deregulatory agenda will all remain unchanged. However, a Democratic-controlled Congress can block bills, conduct investigations, and hold hearings. If Democrats control the Senate, it will also affect the confirmation environment for judges, regulatory agency officials, and senior government officials. This is a political configuration worth watching, but it may not necessarily have much impact on the S&P 500. How does historical data view this specific political configuration? Historically, in the year after midterm elections end, the US stock market has almost always risen. But investors need to further break down this statistic by the outcome of the midterms to gain deeper insight. Birinyi Associates tracked data from 1962 to 2006 and found that when a Republican president faced a House and Senate controlled by Democrats, the S&P 500's average return was 13.9%. By comparison, when Republicans fully controlled the White House and Congress, the S&P 500's average return in three relevant periods was only 3.3%. Therefore, in practice, a sweeping Democratic victory would put investors into a political configuration that has historically been more favorable for the stock market. However, investors should not rely too heavily on these data, because the sample size is small and the periods are relatively distant. Here, the more accurate comparison should be midterm elections held during a president's second term, with the opposition party ultimately winning both chambers of Congress. Such cases include 1986 under Reagan, 2006 under George W. Bush, and the opposite direction in 2014 under Obama. According to Yardeni Research data, in the 12 months after those three elections ended, the S&P 500 rose 1.1%, 6.7%, and 4.5%, respectively. All three performances were positive, but all were below the roughly 15% average gain after all midterm elections since 1950 in the same dataset. The real risk lies in the fiscal calendar Political gridlock is usually seen as fiscal restraint, which should be positive for the bond market, but investors can also argue from another angle that political gridlock may be detrimental to controlling the fiscal deficit. Specifically, it will change the dynamics of debt ceiling negotiations. The relevant negotiations are expected to begin around mid-2027 to late summer, and this time the political gridlock may be more severe than ever before. If Democrats control the Senate, their bargaining chips in the negotiations will increase substantially. Schroders global estimates that a last-minute compromise between the two sides could expand the fiscal deficit by about 1% of GDP. This is exactly where this election connects with the bond market. Schroders global believes that a divided Congress could trigger a two-stage market reaction. First, as investors begin to price in expectations of weaker near-term fiscal expansion, bond yields will fall; then, as debt ceiling negotiations approach, market attention will turn to the price that must be paid to reach an agreement, and yields will rise again. Sector performance divergence, rather than the overall direction of the index Who controls Washington truly offers opportunities for excess returns, and these come more from specific stocks and sectors than from the index itself. Saxo Bank cited research noting that in past years of sweeping Democratic victories, financials and healthcare were historically the worst-performing sectors. However, in those cases of sweeping Democratic victories, the White House was also controlled by Democrats. Nevertheless, James Foord believes investors can still expect these two sectors to face stricter scrutiny, especially healthcare, where drug pricing has long been a major issue. As for AI, data center construction has become an issue of bipartisan concern. This shows that no matter who wins the election, the challenges facing the AI industry will not disappear. James Foord cited JPMorgan analysis noting that for the currently most likely "Blue Wave" scenario, the S&P 500's range will be between a decline of 0.25% and a gain of 0.50%. The logic is as stated above: Trump will not sign legislation restricting AI development, and Democrats do not have enough seats to override a presidential veto. Ultimately, this means market pullbacks remain buying opportunities. For the market, the best but least likely scenario is that Republicans continue to control both chambers of Congress. JPMorgan expects that under this scenario, the S&P 500 will rise 1.00% to 1.25%. However, this is also the scenario in which JPMorgan expects long-term Treasury yields to rise, because deficit spending will continue to remain at a high level. James Foord concluded that a sweeping Democratic victory may sound worrying, but historical experience shows things may not turn out that way. Ultimately, it will create political gridlock, which may actually mean lower policy volatility, at least before debt ceiling negotiations arrive. At the same time, after the recent selloff, the S&P 500, especially the Nasdaq, now looks attractive. Likewise, long-term bonds may have already bottomed.