Final Midterm Election Preview

Summary

• Equity markets may experience an immediate knee-jerk reaction to midterm election results followed by a later reassessment.
• The base case forecast predicts gridlock in the coming two years with few major policy changes regardless of the outcome.
• The Senate majority race is too close to call, but a 50/50 split with Vice President Vance breaking ties for Republicans is the expected prediction.
• The Alaska Senate race could delay the final outcome for several weeks due to ranked-choice voting processes.
• The House race is considered over, with Democrats expected to win a majority roughly in line with the post-World War II average gain of 26 seats.
• Investors anticipate Democrats will win the House but remain uncertain about Senate control, which could trigger immediate market volatility.
• Congress is likely to agree on little over the next two years, even if Democrats win both chambers.
• If Democrats win the Senate, clean energy, healthcare, consumer, \& industrials/infrastructure sectors may rally on perceived policy benefits.
• If Democrats win the Senate, pharmaceuticals, data centers, artificial intelligence, defense, \& banks/financial services may face selling pressure.
• Drug price regulation is viewed as an area of potential common ground between the White House \& congressional Democrats.
• Congress is skeptical about passing meaningful AI regulation or heavy-handed data center bills in the next two years.
• Defense budgets are likely to increase regardless of election outcomes, though Democratic control could slow the growth rate.
• A Democratic sweep could boost prospects for a credit card interest rate cap proposal, while a Republican hold could lower those chances.
• If Republicans keep the Senate majority, a relief rally may occur in sectors that typically react negatively to a Democratic victory.
• Under a split Congress, Democrats would govern the House while Senate Republicans act as a check on both Democrats \& Trump's populist impulses.
• Democrats have a pathway to win the Senate, but the Stifel forecast rates 13 key races as decisive for the majority.
• The best guess predicts Democrats will gain three seats net, resulting in a 50/50 Senate where Republicans maintain the majority.
• Notable Republican holds include Alaska \& Maine, though both races are considered close.
• Kalshi currently assigns Democrats a 72% chance of winning the Senate, which the authors consider too bullish.
• The authors question whether enough states will swing to Democrats, noting a decent chance Michigan could flip to the GOP.
• Democrats need to gain only three seats net to retake the House, with Kalshi showing a 93% probability of this outcome.
• Historical data shows the party not controlling the White House gained seats in 17 of 19 midterm elections since World War II.
• Republican redistricting efforts in certain states may prevent Democrats from meeting the historical average gain of 26 seats.