The US midterm election result is unlikely to see a material change to the US fiscal outlook, while the presidential veto will likely prevent major policy reversals by the Trump administration, says Michael Grady.
Read this article to understand:
- What the midterm elections mean for financial markets
- Why a Democratic victory is unlikely to have much impact on the fiscal outlook
- Why we remain bullish on US equities but believe bonds could fall further
The Democratic Party’s capture of the US legislature is unlikely to see a material change to the US fiscal outlook. The Democrat-controlled Congress will need to extend spending authority and raise the debt ceiling in 2027 and could try to deliver a modest expansion of fiscal policy, perhaps reversing some of the planned spending cuts from the last Congress.
But with presidential veto, the Congress is unlikely to force any major policy reversals from President Donald Trump’s administration.
Overall, we remain bullish on the outlook for US equities
As such, we expect limited market reaction from the election outcome itself. Political gridlock is likely to be mildly positive for equities, but the more important implications will come from any change in President Trump’s stance on the conflict in Iran.
Looking ahead to the next budget process, there may be a narrow path to a bipartisan compromise in which Democrats agree to increased defence spending in return for delayed cuts to welfare programmes. If achieved, that could provide modest additional fiscal support in 2027 and we expect the deficit to remain around six per cent of GDP over the next two years.
US trade policy is likely to be unaffected by the result, while Democratic control of the Senate is important for confirming high-level White House appointments. This may be perceived as a negative for de-regulation but may also allay concerns on the independence of the Federal Reserve (Fed).
Meanwhile, the Democratic Party’s capture of several key states’ governorships, most notably Texas, could have some impact on the pace of approval for construction of new data centres, as tougher state regulations are likely to be rolled out. This poses some risk to those stocks that have been buoyed by the artificial intelligence boom.
That said, there has already been a notable decline in share prices in some key sectors, such as US semiconductor companies, in the run-up to the election, suggesting this risk may already have been factored in.
This election result does nothing to change our bullish view on the outlook for US equities
Overall, we remain bullish on the outlook for US equities, given the strength of the economy and the pace at which firms have been growing earnings. This election result does nothing to change our view.
By contrast, we are bearish on the prospects for the US government bond market, given the rate at which the economy is growing and the risk of inflation, which has already pushed the Fed to begin hiking rates.
