US midterm elections – snapshot reaction

The midterm election result should have limited direct effects on fiscal policy, while political gridlock supports US equities and higher deficits and inflation keep government bonds under pressure.

• A Democratic-controlled Congress may seek modest fiscal expansion in 2027 by reversing some planned spending cuts, but the presidential veto limits the scope for major policy reversals.
• The authors expect the US deficit to remain around 6 per cent of GDP over the next two years, with a possible bipartisan deal pairing higher defence spending with delayed welfare cuts.
• US trade policy should remain unchanged, while Democratic control of the Senate could slow deregulation and reduce concerns about Federal Reserve independence.
• Democratic gains in key governorships, especially Texas, could bring tougher rules for new data-centre construction and weigh on stocks supported by the artificial intelligence boom.
• Some of this risk may already be reflected in prices, since US semiconductor shares declined materially before the election; the article also points to economic strength and rising corporate earnings as support for equities.

Takeaway: Aviva Investors remains bullish on US equities but bearish on US government bonds because stronger growth and inflation risks have already led the Federal Reserve to raise rates.