A ‘Blue Tsunami’ changes the balance of power in Washington

Democratic control of both chambers of Congress should create policy gridlock while leaving the existing investment outlook broadly intact.

• Democrats have won the House and Senate for the second half of President Trump's term, making major changes to taxation, spending and regulation harder to pass in 2027 and 2028.
• Executive authority could keep trade policy, tariffs and foreign affairs prominent, while fossil fuels and artificial intelligence receive particular attention and data-centre regulation may add pressure to the AI investment cycle.
• The election result is mildly negative for US equities in the near term and mildly positive for US Treasuries, while the US dollar is expected to move broadly sideways over the coming months.
• Quintet maintains a slight overweight in equities, focused on quality businesses and resilient earnings, and a slight overweight in US Treasuries for income and portfolio diversification.
• In the firm's analysis of comparable periods since 1970, four of the six strong midterm years were followed by another positive year, while 2027 is historically the strongest year of the presidential cycle for the S&P 500.

Takeaway: Political gridlock may support policy continuity, but inflation, Federal Reserve policy, economic growth, corporate earnings and the AI investment cycle should remain the main drivers of markets.