House of Representatives

We believe that history will repeat itself in the House of Representatives (House) elections and that Democrats will gain control of the House. Midterm elections have a strong historical tendency to favor the party not currently in the White House. In all but two midterm elections stretching back to the middle of the last century, whichever party held the White House lost seats at the midterm election. As the nearby table illustrates, these outcomes haven’t always resulted in a change of control, but Republicans have the thinnest of majorities headed into the midterm elections and can’t afford to lose any seats. The combination of rising prices, an unpopular war in the Middle East, and general unrest argues that the Democrats should see this historical pattern continue. History bears this out: Inflation tends to breed voter dissatisfaction, and presidential approval ratings have typically fallen as gas prices climbed.

And yet this history does provide a slim hope for the Grand Old Party (GOP). The first exception to this 75-year rule occurred in 1998, when the notion of congressional overreach in Bill Clinton’s impeachment process resulted in the Democrats picking up four seats. Similarly (but to the advantage of the Republicans this time), the patriotic response to 9/11 and the onset of the war in Iraq gained George Bush’s Republican Party eight seats in the House in fall 2002. 

Betting markets currently place odds of around 90% that history will indeed rhyme once again and that the Republican Party will lose its majority in the House.

Implications

Whether the Democrats succeed in gaining control of the Senate or not, the likely outcome is a divided government, in which a Republican president must deal with the opposition party in control of one, if not both, houses of Congress. What are the implications for legislation, the economy, and markets?

• As momentous as a change in political control is, the implications for government are ironically limited. The White House has not relied on a Republican majority in the 119th Congress to advance policy, preferring instead to use executive orders and courts to implement change. The notable exception is last year’s One Big Beautiful Bill Act (OBBBA), which, among other priorities, extended the 2017 Tax Cuts and Jobs Act. Even with a majority in the House, Democrats likely won’t have enough votes to override a presidential veto on legislation.
• One specific area of legislation to watch relates to artificial intelligence (AI). The White House is an advocate of AI in general, and data center development in particular, both of which have become points of friction on the campaign trail. Democrats have broadly supported limitations or outright bans on data center construction, and we anticipate that this will quickly become a point of legislative contention when the 120th Congress is seated on January 3, 2027. Capital investment in AI has become an important engine of economic growth, so any legislative constraints on this activity threaten to stall that engine. This is an area where governor races may have a bigger impact, at least on local economies, as states embrace or reject data center development to different degrees.
• Control of the House gives the majority party committee chairmanships and the ability to launch investigations. We anticipate that the Democrats will use these powers to launch investigations throughout the Trump administration, from cabinet officials all the way up to the White House itself. There are likely few economic implications here, although the already heated political environment is almost certain to intensify, with the risk of shorter-term uncertainty-fueled market volatility. A Democratic majority impeached President Trump twice during his first term and is likely to do so again. It requires only a simple majority to impeach.
• But it requires a two-thirds majority in the Senate to remove, and it is a far reach to imagine that around 15 Republican senators would join their Democratic colleagues in voting to remove President Trump from office. Only Mitt Romney (R) voted with Democrats to remove Trump following his first impeachment. He was joined by six more GOP senators following the second impeachment trial, but of those senators, only Lisa Murkowski (R) and Susan Collins (R) (if she holds her Maine seat) remain in office.
• Yet a simple Senate majority can block nominations, giving even a slight Democratic majority power over presidential appointments. At present, this is a moot issue: There are no vacancies on the Supreme Court, no vacancies in federal appeals courts, and no open cabinet positions. But there will be. It is quite common for cabinet officials to “retire early” during a president’s last two years in office, although “acting” secretaries can serve without Senate confirmation for up to 210 days (a rule honored more in the breach than in the observance).
• If there is a vacancy on the Supreme Court, we expect Democrats to invoke the “McConnell rule” used by then-majority leader Mitch McConnell to delay President Barack Obama’s nomination of Merrick Garland to the high court. McConnell argued that when different parties control Congress and the White House, the people ought to have the right to vote in the next election prior to the nomination of a justice. Such is likely to be the case following the midterms. Notably, there is no requirement or timeframe that the court have nine justices: There were only eight justices between the death of Antonin Scalia in February 2016 and Neil Gorsuch’s eventual appointment in April 2017. The court operates just fine with eight justices. A 4-4 tie in the Supreme Court means the decision of the lower court is automatically affirmed and left in place.
• A rare point of political agreement in Washington is that neither party cares about debt or deficits, except when politically expedient. Democratic policies tend to spend more money on entitlement and social issues, while Republicans tend to spend more money on military and tax cuts, but both lead to the same fiscal end of persistent deficits and rising debt. It would take rare bipartisan agreement to cut spending and/or raise taxes, and we don’t see that developing over the next two years.
• The debt ceiling could, however, put debt and deficits front and center for the new Congress. The ceiling was last raised in July 2025 (as part of the OBBBA), to the current level of $41.1 trillion, precisely to push the issue beyond the 2026 midterm election. Mission accomplished, but also mission postponed. Outstanding federal debt currently amounts to $40.2 trillion, allowing for the issuance of additional debt of $900 billion before bumping into legislative constraints. The federal deficit over the past year is just shy of $2 trillion, implying that the government has another six months or so before needing to raise the debt ceiling again. As has been the case in the past, we expect that this will become a political friction point again, as Democrats withhold votes in an effort to sway White House policy. It would not surprise us if a lame-duck Republican Congress voted pre-emptively to raise the debt ceiling to deprive a likely Democratic majority of this legislative weapon.

Asset allocation implications

Financial markets have typically looked through the uncertainty of changes in political control, and we expect this time to unfold similarly. It is important to remember that there are many more important drivers of markets than elections, including the underlying economy, company earnings, and valuations. There is certainly the possibility or even probability of short-term price volatility, but this is a feature, not a bug, of financial markets. Midterm election years have often seen volatility rise in October ahead of the election, yet once the election has passed, volatility has tended to subside.

Overall, divided government tends to be a positive backdrop for risk assets, as it decreases the likelihood of sweeping legislation that could have negative ramifications for markets. In our view, the election results are unlikely to warrant major changes to long-term investment allocations.

Yet the change in the balance of power in Washington could have implications for policy that can affect certain industries and sectors. One, which we alluded to earlier, is legislation that would encourage or restrain AI capital spending, and we are watching these developments closely, monitoring proposed policies that could affect AI investment fundamentals. Recommended portfolio changes would only follow evidence that policy is likely to alter business economics or expected returns, considered alongside valuation and the broader market backdrop.

A divided government leads us to expect no big changes one way or the other at the federal level. Still, state and local decisions on data centers, electricity, and taxes collectively have the potential to affect certain parts of the AI investment cycle even if Congress passes little. Governors, utility regulators, and local authorities influence where and when data centers can operate. Permitting delays, grid connections, water access, power charges, and changes to tax incentives can raise costs or postpone revenue. Texas is especially important because of its concentration of planned projects and ongoing review of large electricity loads. Georgia, Ohio, and other states also face debate over developments and their costs to communities. Changes in state rules or local exemptions would affect different projects and companies differently and therefore are best evaluated on a company-by-company basis.

Heightened political uncertainty reminds us of the importance of diversification. This is important in any economic, market, or political environment but is critically important at present given the wider range of potential outcomes. We encourage investors to revisit their asset allocation, as market appreciation and interest rate volatility might warrant rebalancing as the year comes to an end. Portfolios should remain aligned with each client’s objectives, liquidity needs, and capacity for risk.