Investors are predicting a blue wave in next week’s midterm elections as Democrats surge in the polls and President Donald Trump’s approval ratings remain low.
Polls show Democrats are likely to take control of the House, and analysts who analyze what politics means for investors are scrambling to tell clients how to prepare for what Congress will look like after Tuesday’s election.
Concerns about the Democratic-controlled Congress’ spending plans and priorities pervade analyst reports reviewed by CNBC. But with two years left in President Trump’s term, analysts advise clients that a divided government would create a stalemate and that Congressional leadership opposed to the president would not be able to accomplish much.
Most analysts believe Democrats are within striking distance of a Senate majority, but polls show the outcome is significantly less likely than a reversal in the House. Next Tuesday’s elections will decide which party will control both houses of Congress for the remainder of President Trump’s term, after two years of complete Republican control.
Divided governments typically make it harder to enact must-pass legislation, such as providing government funding or raising the debt ceiling. The debt ceiling impasse, the first federal default in history, could be particularly damaging.
Wall Street watchers also expect Democrats to try to push through an ambitious and expensive agenda if they take control of Congress. An Oct. 29 report by Piper Sandler, which analyzed Congressional Budget Office data, predicted that Democratic policy proposals would “increase the budget deficit by $5 trillion over the next 10 years.” The analysis assumes a repeal of President Trump’s tariffs and reversal of Medicaid, nutrition programs, and Affordable Care Act subsidy cuts.
Divided governments are less likely to agree on issues, making major policy changes and large-scale spending less likely. This is the dynamic that markets typically enjoy. President Trump’s veto would effectively block the passage of major Democratic policies.
“The Oval Office is a clear consensus base case,” Wolf Research said in an Oct. 27 report. The firm surveyed 138 investors and found that 96% of those surveyed believed that Democrats would win the House majority.
“The magnitude of the polling error required for Republicans to maintain their House majority is unprecedented in modern history and will far exceed the polling error of the infamous 2020 polling cycle,” Wolf wrote.
Wolf is less bullish on the Democratic Senate, but investors clearly see a chance for Democrats to regain control of both chambers.
Fifty-eight percent of investors surveyed by the firm believe Democrats will win the Senate majority, while 42% believe Republicans will maintain the Senate majority. Investors surveyed were even more bullish than Mr. Wolf himself, giving him a 49% chance of winning the Democratic Senate.
Other analysts broadly agree that it could be a good night for Democrats.
“The blue wave scenario has become our baseline scenario,” TD Securities’ Oct. 20 report said. An Oct. 23 Raymond James report said, “Democrats are in solid position to win a majority in the House and are increasingly likely to win enough seats to win a Senate majority.”
Even if Democrats win control of both chambers, it could still be a long battle as Republicans will retain the White House and the Senate must pass the filibuster threshold of 60 votes.
TD predicted that if Democrats win a Senate majority, concerns about the Fed’s independence from President Trump could allay.
A new Fed director would need Senate confirmation, and the Senate is unlikely to support a nominee who doesn’t support the central bank charting its own course.
Democrats are also expected to investigate companies that do business with the Trump administration if they gain control of Congress. The parliamentary majority has subpoena power to committees. Some Democratic lawmakers have already telegraphed their research priorities ahead of the election.
The debt ceiling is likely to be the most significant economic bottleneck that lawmakers will need to address in the next Congress, unless Republicans raise it during the lame duck period between the election and the start of the next Congress in January. The Bipartisan Policy Center projects the U.S. will reach the so-called X date (the point at which the Treasury runs out of cash under the debt ceiling) sometime between late winter and mid-summer 2027.
“Negotiations over the debt ceiling could be concluded, but a Democratic Congress would have a slightly better chance of passing the bill than a divided Congress,” TD said.
If Congress does not raise the debt ceiling by date X, the United States could default on its debts, causing catastrophic economic consequences.
If Democrats take control of parts of the government, they are likely to demand concessions from Republicans in exchange for a vote to raise the debt ceiling. This could lead to a confrontation, which analysts say could be avoided if Republicans lose next week and raise the debt ceiling during the lame duck.
“Raising the debt ceiling by January could significantly reduce Democratic influence over health care, Medicaid, SNAP, and broader domestic spending priorities in the next Congress,” Raymond James told clients.
