Investors are expecting a blue wave in next week’s midterm elections, as Democrats rise in the polls and President Donald Trump’s approval rating remains low.
Public polls suggest that Democrats will likely take control of the House of Representatives, and analysts who analyze what politics means for investors are rushing to tell their clients how to prepare for what Congress will look like after Tuesday’s elections.
Concerns about the spending plans and priorities of a Democratic-controlled Congress permeate analyst reports reviewed by CNBC. But because Trump has two years left in his presidency, a divided government would likely create a gridlock that would prevent congressional leaders opposed to the president from getting much done, analysts advise clients.
Most analysts believe Democrats are also within reach of a majority in the Senate, although that outcome is significantly less likely than a House upset, according to polls. Next Tuesday’s election will determine which party controls both houses of Congress for the remainder of Trump’s presidency, after two years of total Republican control.
Divided government generally makes it harder to pass much-needed legislation, like public funding and raising the debt ceiling. An impasse on the debt ceiling – or the first federal debt default – could be particularly damaging.
Wall Street observers also expect Democrats to try to advance an ambitious and expensive agenda if they take control of Congress. An October 29 report from Piper Sandler analyzing Congressional Budget Office data projects that Democrats’ policy proposals would “add $5 trillion to the deficit over the coming decade.” The analysis assumes repeal of Trump’s tariffs and rollback of cuts to Medicaid, nutrition programs and Affordable Care Act subsidies.
Major policy changes – and major spending programs – become less likely because a divided government is unlikely to agree on issues. This is a dynamic that the market generally benefits from. Trump’s veto would effectively prevent major Democratic policies from becoming law.
“A Blue House is the most obvious base case scenario,” Wolfe Research said in an Oct. 27 report. The company surveyed 138 investors and found that 96% of respondents believed Democrats would prevail in control of the House.
“The magnitude of the polling error that would be necessary for Republicans to maintain control of the House would be unprecedented in modern history, far greater than the polling error of the famously bad 2020 cycle,” Wolfe wrote.
Wolfe is less optimistic about a Democratic Senate, although investors clearly see the possibility that Democrats will regain control of both houses of Congress.
Fifty-eight percent of investors surveyed by the firm thought Democrats would take control of the Senate, while 42% thought Republicans would maintain control of the chamber. Investors surveyed were more optimistic than Wolfe himself, putting the chances of a Democratic Senate at 49%.
Other analysts largely agree on the possibility of a good night for Democrats.
“A blue wave scenario has become our base case,” reads an October 20 report from TD Securities. An October 23 report from Raymond James states that “Democrats are in a strong position to win a majority in the House of Representatives and are increasingly likely to win enough seats to capture a majority in the Senate.”
Even if Democrats win both chambers, protracted battles could still unfold as Republicans hold on to the White House and the Senate has yet to surpass the 60-vote filibuster threshold.
Democrats taking control of the Senate could ease concerns about the Federal Reserve’s independence from Trump, TD predicts.
Indeed, any new Fed member would have to be confirmed by the Senate, which would likely not support a nominee who did not support the central bank charting its own course.
Democrats are also expected to investigate companies that did business with the Trump administration if they take control of a chamber. The majority party in Congress has subpoena power in committees. Some Democrats have already telegraphed their investigative priorities ahead of the election.
The debt ceiling is likely the most critical sticking point for the economy that lawmakers will need to address in the next Congress, unless Republicans take it up in the lame duck session between the elections and the start of the next Congress in January. The Bipartisan Policy Center expects the United States to reach the debt limit sometime between late winter and mid-summer 2027.
“While negotiations around the debt ceiling may end, a Democratic Congress would make passage of a bill slightly more likely than a divided Congress,” TD said.
If Congress does not raise the debt ceiling, the United States could default on its debt, which would have catastrophic economic consequences.
Democrats, if they control part of the government, should demand concessions from Republicans in exchange for their votes to raise the debt ceiling. That creates a potential impasse, which analysts note Republicans could avoid if they lose next week and raise the debt ceiling during the lame duck.
“(Re)raising the debt ceiling before January could significantly reduce the leverage Democrats have over health care, Medicaid, SNAP and broader domestic spending priorities in the next Congress,” Raymond James told clients.
Correction: This story has been corrected to reflect that the Bipartisan Policy Center projects that the United States will reach its debt limit next year. An earlier version misinterpreted the center projection.
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