Midterm Election Views
Over the last two years, consumer sentiment has been in decline, following the trend of the last administration. Perceptions of current economic conditions have fallen to levels not seen since the 1960’s. The high cost of living (i.e., affordability crisis), now exacerbated by high interest rates and increasing gas prices from the War in Iran, has given Democrats an “in” with voters.
Democrats will likely gain control of the House, but control of the Senate is more difficult, in our view. Since Republicans hold the presidency (and subsequent vice presidency), Democrats will need to win 51 seats to overcome the VP tiebreaker vote that would keep Republicans in control under a 50/50 Senate.
Prediction markets imply the greatest likelihood of a Democratic “sweep”, but polling margins remain broadly comparable to Trump 1.0 midterms in 2018 when Democrats won the House decisively, but Republicans held onto the Senate. Midterm “sweeps” are not common, but Trump has a lower approval rating this time, and generally lower midterm turnout adds to the uncertainty.
Brazil’s election surprise is a reminder that prediction markets can misprice political tail risks, raising questions around the roughly 70% odds now assigned to a blue “sweep” in the midterms. While these prediction markets capture broad voter sentiment, they may still embed the same nonresponse biases that produced larger polling errors when President Trump is in office and/or on the ballot (when the margin of error is larger than historical average).
Market Scenarios
Blue Sweep (45% Prob): We think it’s a closer call than what prediction sites are implying, but nevertheless, we don’t see the Democrats winning both chambers of Congress as fully priced-in. On one hand, we expect US long-term rates to rally on fiscal gridlock expectations, but on the other, a very strong performance by the Democrats in this cycle could increase expectations of a unified Democratic government in the next cycle (2028 presidential election), thus raising concerns about a less fiscal restraint. Therefore, there could be a two-stage move in the bond market.
A Blue “sweep” would be another headwind for US equities, and it goes beyond just fears of AI regulation (which the President would likely veto). Greater Democrat control could raise the risk of excise or compute taxes that lower returns on future AI investment, while also creating potential headwinds for crypto and defense.
Divided Congress (50% Prob): Our base case is that the Democrats take the House and the Republicans narrowly keep the Senate (51/49 or 50/50 with the VP as tie-breaker). In our view, this is the most market friendly outcome. Uncertainty would lift, and a divided government would limit policy changes (i.e., gridlock) while preserving AI investment. Given polling margins and prediction site probabilities, we expect a decent equity rally and a muted bond reaction as the market quickly refocuses on underlying trends.
Red Sweep (5% Prob): It's unlikely the polls and prediction sites are this far off the mark, but stocks would rip, bonds would dip.
Download the PDF above to read our full assessment of the 2026 Midterm Election…