Market Flash: US mid-terms will lead to gridlock in Washington

The US mid-terms delivered a significant setback for President Trump’s political strength, at least domestically.

As widely expected, the Democrats took the House of Representatives, the chamber of Congress that has the most control over setting fiscal policy. Importantly, the Democrats also seized control of the Senate. This was more in the balance heading into the vote.

For markets, the most immediate consequence is likely to be political gridlock. With Congress under Democratic control but Trump remaining in the White House, passing major new legislation on tax and spending will become considerably more difficult. This reduces the prospect of another large fiscal package similar to the One Big Beautiful Bill, potentially implying a more restrained fiscal outlook and providing some support for US Treasury bonds. There may also be implications for the AI investment boom. The construction of large data centres has become a politically contentious topic in the US. Many officials ran on the promise of putting restrictions or greater scrutiny on their development. 

As a result, in the early morning after the vote, we saw chipmakers in Asia initially come under pressure. However, by mid-morning US stocks were rising. Investors took comfort from the now split government as well as the fact that Trump accepted the result. For tech companies, investors had been concerned about the amount of capex spending on AI infrastructure, so more restrictions on data centres could rein in their spending. Bond prices also rose as yields fell. As investors move on from the mid-terms, attention will turn back to how the AI investment story develops as well as the conflict in the Middle East. The past month has shown how important it is to gain exposure to the US in a well-diversified way (for example through a multi-factor approach). Despite technology struggling, other sectors have continued to perform well.

Risk warning 
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