Markets are already pricing in that Democrats could gain control of the House of Representatives, while the Senate remains more complicated terrain. This is highlighted by AllianzGI in its analysis of the upcoming November 3 legislative elections, citing data from Polymarket and Bloomberg: a 64% probability of a complete Democratic victory, 28% for a divided government, and 8% for a Republican sweep. UBS Global Wealth Management is more cautious: 50% for a Democratic Congress, 40% for a divided government, and 10% for a Republican win.
Beyond the outcome, both firms agree on where the key questions raised by the election are concentrated: debt and the budget, with potential impact on interest rates and the dollar, rather than a shift in fiscal direction. “We are not making any changes to our portfolio allocations around the midterm elections,” stated Kurt Reiman, Head of Fixed Income Americas and leader of Election Watch at UBS Global Wealth Management, during a panel discussion attended by Funds Society.
What markets are pricing in
According to AllianzGI, Republicans currently hold a three-seat majority in the Senate and a one-seat edge in the House, and Democrats would need to gain four seats in the upper chamber. The asset manager stresses that the president’s party has lost these elections in 18 of the last 20 cycles, and Donald Trump’s net approval rating sits around -25 points. Reiman maintained that there is no major difference between a divided government—with Democrats controlling only the House—and one with Democrats holding both chambers. Where it does matter, he noted, is in presidential appointments, judicial nominations, and budget reconciliation. Because the likelihood of a veto-proof Democratic majority is very low, UBS expects a period of legislative gridlock. According to its analysis, equities perform reasonably well during such periods, though Reiman dismissed this as an absolute rule: “We push back against the notion that gridlock is necessarily good.”
If Democrats were to win the Senate by more than one or two seats and the House by a margin of a dozen or couple dozen seats, Reiman acknowledged there could be short-lived equity weakness driven by the prospect of increased regulation. Nevertheless, he considered that volatility would dissipate quickly and markets would refocus on fundamentals: the economy, monetary policy, fiscal policy, inflation, and, above all, corporate earnings.
Debt and the budget: the concerning calendar
AllianzGI identifies the December 11 funding deadline and the debt ceiling “cliff” in the spring of 2027 as immediate risks. In a divided Congress, it explains, the ability to pass measures beyond baseline funding would be constrained, and volatility would tend to increase as those dates approach.
Jonathan Pingle, Chief U.S. Economist at UBS Investment Bank, pointed in the same direction: “Democrats will hold certain bargaining power, whether around raising the debt ceiling, passing budgets, or simply around broader spending measures, such as trying to keep the lights on in the federal government.” His expectation is that concessions will be negotiated around cuts that are already taking effect: shifting a portion of Medicaid costs to the states, work requirements for SNAP, and the ACA subsidies that expired last year.
Asked about the likelihood of Democrats utilizing this lever—a tactic historically associated with Republicans—Pingle answered that he expects them to “use it or try to use it.” He added that Republicans have discussed raising the limit during the lame-duck session via reconciliation, though they have yet to reach consensus on a plan. Reiman described a potential compromise: increased defense spending for Republicans in exchange for deferring part of the cuts to Medicaid and social programs.
Bonds and interest rates
According to AllianzGI, the risks of a divided Congress would tend to concentrate in short-dated Treasuries and the short end of the curve. Each flare-up in tension could temporarily lift both the U.S. dollar and gold, though it is unlikely to cause lasting changes.
Reiman assessed that the bond market “is pretty well positioned right now.” He attributed the summer uptick in yields more to stronger economic growth and higher-than-expected inflation than to fiscal concerns, noting that the market is already pricing in “three or four additional rate hikes” from the Fed. He explained that building an intermediate-duration portfolio with modest credit risk yielding around 6% is achievable “fairly easily.” UBS favors credit (investment grade and high-yield corporate bonds) and securitized products, while modestly extending duration via preferred securities.
Pingle described the fiscal outlook as “bleak” and estimated that the yield shift since the beginning of the year, relative to the latest CBO projections, implies more than 2,500,000,000,000 dollars in additional net interest spending over ten years. He voiced skepticism that this Congress will address the issue legislatively.
The dollar and the Federal Reserve
AllianzGI outlines three scenarios for the dollar. In a divided outcome, episodes of tension could provide a temporary lift. In a Republican sweep across both chambers—which it considers the most deficit-expansive outcome—it anticipates higher Treasury issuance, rising term premia, a steeper curve, and a stronger dollar in the near term. In a full Democratic sweep, a risk-off reaction would cause a modest steepening of the curve.
On the institutional front, Pingle recalled that since the Reagan administration, at least one cabinet-level resignation typically occurs shortly after the midterms. With a Democratic Senate, the opposition would control the confirmation of replacements. For the Federal Reserve, he stated, that “will ease concerns regarding Fed independence.” He further projected that up to four members of the Board of Governors and the FOMC could depart before early 2028.
For AllianzGI, the equity market reaction to a Democratic Congress would depend on the prominence of the progressive wing. Markets could react negatively if momentum builds around regulating artificial intelligence and data centers, wealth taxes, or Medicare for All. More moderate priorities, such as reversing SNAP or Medicaid cuts, could benefit the healthcare and consumer staples sectors. Under the Republican scenario, defense, financial services, and energy would stand as the primary beneficiaries.
Reiman noted that an unexpected increase in defense spending could support industrials—a sector favored by UBS—and cited hospitals and medical device companies if spending cuts are delayed. He clarified that they do not advise buying these sectors purely on the election outcome.
What does not change
AllianzGI maintains that under any of the three outcomes, fiscal consolidation is practically off the table, and over the longer term, the greatest threat remains mandatory spending. It adds that the Executive branch will continue to rely heavily on direct action, a point echoed by Reiman: the White House’s use of foreign and trade policy “is unlikely to change much.” He noted that tariff revenues that had been taken for granted are being refunded following a February ruling on the IEEPA, and that legal challenges to replacement measures could worsen the fiscal picture.
Regarding artificial intelligence, Reiman noted that data centers represent “the physical, tangible manifestation” of voter concerns and does not view a blanket moratorium as likely, though tax incentives may disappear. UBS expects CapEx to expand next year. AllianzGI agrees that the election outcome is unlikely to significantly slow the expansion of computational capacity.
