US midterm elections: What a Democratic sweep means for the economic outlook

A Democratic sweep will constrain President Trump's domestic agenda while leaving executive-led foreign policy largely intact and increasing the risk of fiscal easing.

• Democrats are projected to win more than 250 House seats and gain eight Senate seats for a 55-45 majority, creating the largest House majority since 2008 and the strongest Senate position since 2012.
• The Senate filibuster and presidential veto will limit major legislation, while reconciliation could advance healthcare, social spending and clean-energy priorities; government funding expires on December 11 and the debt ceiling could be reached around the second quarter of 2027.
• Democrats flipped governorships in Texas, Ohio and Georgia, which together account for almost one-third of planned US data-centre capacity, creating risks of tighter permits, water protections and higher energy costs for AI infrastructure.
• Trump retains executive control over tariffs, immigration and foreign policy, while Section 301 investigations could replace tariffs struck down under IEEPA and keep trade restrictions central to policy.
• The authors expect US growth to slow to trend in 2027 after strong 2026 growth, alongside a renewed Fed hiking cycle, tighter financial conditions, geopolitical shocks and continued upside risks to oil prices from the Iran war.

Takeaway: The main investment risk is a more expansionary fiscal mix combined with pressure on AI capital spending, persistent US-China tensions and a potentially weaker US growth outlook; the authors continue to expect US equities to outperform bonds by a smaller margin than history and non-US equities to outperform US equities over the long term.