What the U.S. Midterm Election Results Could Mean for Markets

The results of the 2026 U.S. Congressional midterm elections are in, but in and of themselves, they may not result in significant shifts to the economy and markets. Democratic control of both houses of Congress could complicate the President’s domestic agenda, but it is unlikely to dramatically alter the political landscape. Importantly, we see little potential for any major changes to tax or spending policy in the near term, meaning that the numerator in the debt-to-GDP equation is unlikely to improve anytime soon, and the current fiscal situation is likely to persist.

Even with Democrats controlling both chambers, divided government complicates governing, but it would reduce the number of negotiators from three to two. The Senate filibuster and the power of the President’s veto means that legislative measures will still require some bipartisan support, but both sides have already shown support and possible alignment on debt-limit reform, permitting and housing policy. Political incentives on both sides could still limit cooperation, as lawmakers weigh the 2028 election and the administration retains the option of acting through executive authority.

Second-term presidents have often turned their focus to legacy, frequently emphasizing foreign policy, where they have more power to act unilaterally. Indeed, the President has in the past portrayed his tariff, visa, immigration and tax policies as defining actions of his administration. Taking this framework one step further, the President could attempt to secure a domestic legacy by reaching a deal with Congress on a signature policy item. Social Security is the largest and most obvious candidate, but the President has not yet signaled interest in such a deal. The 2026 Trustees Report projects that the retirement trust fund will be depleted in late 2032 (2034 on a combined retirement and disability basis), and both parties may choose to delay action until that deadline draws closer.

Were the President to pursue a Social Security deal, we could see a package develop that combines revenue measures, such as raising or removing the cap on taxable earnings, with benefits adjustments, such as means-testing. The near-term impact of any deal would, at least initially, likely be viewed positively by markets as it would remove one avenue of fiscal stress. Like the bipartisan deficit-reduction agreements of the early 1990s under the first President Bush, markets could respond favorably, with lower yields and an otherwise healthier economy than one in which the fiscal situation remained unresolved.