Midterm elections could bring AI surveillance and debt ceiling into play

Voters across America will vote Tuesday in the midterm elections, which will determine control of Congress and could add to investors’ concerns about oversight of the artificial intelligence (AI) sector and how the debt ceiling will be addressed next year.

Since President Donald Trump’s second term began in 2025 with Republican majorities in both houses of Congress, the S&P 500 has gained about 27%, driven in part by a massive influx of AI spending and strong profit growth.

Treasury yields are also significantly higher, in part because of geopolitical risks that emerged with the outbreak of war in Iran in late February, which caused a surge in energy prices. U.S. budget deficits have continued to widen to around $2 trillion, adding upward pressure on yields as debt issuance increases.

Investors are weighing the impact of election results on the outlook for financial markets depending on whether Democrats take control of one or both houses of Congress.

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The midterm elections will determine control of Congress for the next two years, which will have implications for the nation’s finances and markets. (J. David Ake/Getty Images)

Since 1930, there have been eight midterm cycles in which the president’s party lost control of the House, and the S&P 500 rose five times for the rest of the year, Ned Davis Research said. He recorded a median gain of 1.4% between Election Day and the end of the year, slightly lower than the 1.9% recorded in all post-Election Day midterm years.

In a scenario in which Democrats take control of both houses of Congress, investors expect tighter oversight of AI, which could weigh on markets driven higher by the emerging technology.

Democratic majorities would have the ability to investigate U.S. companies while trying to slow deregulation, which could increase market volatility.

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Markets have generally performed well under divided government. (Michael Nagle/Bloomberg via Getty Images)

If the Democrats win the House but the Republicans maintain their majority in the Senate, the consequences for the US fiscal situation could be mixed.

Bipartisan compromises would be needed on issues such as funding the government to avoid shutdowns and raising the debt ceiling, which could create the potential for brinkmanship.

In a scenario where Republicans maintain their majorities in the House and Senate, the Republican Party could pursue new tax reforms or increase defense spending.

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The results of the midterm elections will impact negotiations between Congress and the Trump administration depending on who controls the House and Senate. (Grant Baldwin/AFP via Getty Images)

Ed Clissold, chief U.S. strategist for Ned Davis, said a Democratic takeover of the House could modestly moderate the U.S. stock market’s year-end rally, but that generally hasn’t stopped stocks from advancing.

“The conventional wisdom is that gridlock is good (for stocks),” Clissold said, adding that stocks have performed better under Democratic presidents than under Republican presidents.

Diego Barnuevo, market analyst at Ebury, said a Democratic-majority Congress with the White House would likely be limited to the budget and debt ceiling, and that a “Democratic coup would be neutral to slightly positive for the fiscal outlook.”

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A Republican victory could ease concerns about investigations into AI companies that could disrupt markets.

“If Republicans retain control of Congress, it would likely provide the most favorable federal policy environment for AI and infrastructure development through policy continuity, potential fiscal expansion, deregulation and faster federal authorizations,” JPMorgan strategists said in a note.

Reuters contributed to this report.