Trump, the debt ceiling and chaos: Why markets care about the election

Markets are starting to focus on the 2026 midterm elections, which are just 10 weeks away and could wrest full control of Congress from President Donald Trump and the Republican Party.

Democrats are favored to win at least one congressional seat in November and have a roughly 6 percentage point lead in the popular vote, according to Fifty Plus One, a website that tracks poll results. A divided Washington would likely prevent lawmakers from passing major non-partisan legislation while turning the Legislature’s most basic tasks into protracted negotiations.

Analysts detailed to CNBC how a full or partial change in power from Republicans to Democrats in Congress could affect the country’s capital markets. Potential outcomes include a prolonged standoff over raising the debt ceiling, tougher executive action, and potential instability if we wait longer for election results.

Divided government tends to constrain federal action, but that won’t necessarily be the case if President Donald Trump remains in the White House for two years into the next Congress.

“One of the things we hear a lot is that markets like divided government, and that usually means extreme positions aren’t enacted,” said Ed Mills, managing director of Washington policy at Raymond James. “But what we have been warning about is that the biggest market movements from a policy perspective over the last two years have been due to executive action.”

“After the midterm elections, if Democrats win at least a majority in the House, do you think President Trump will work more with Democrats? Or is he more likely to be more aggressive in presidential action? My bet is on more presidential action,” Mills said.

The most notable of President Trump’s executive actions that moved markets was his tariff campaign, which used untested emergency powers to impose broad levies on a wide range of countries. The tariffs, imposed under the International Emergency Economic Powers Act, were ultimately ruled unconstitutional by the Supreme Court, but were held up for more than a year, weighing heavily on the market. President Trump is then using other executive powers to replace the vetoed tariffs with new tariffs.

Mr. Trump often touts the performance of the stock market. S&P500 JPMorgan said in a June report that going back to 1950, the S&P 500 performed better under divided Congresses than under one-party control. The company also noted that even if Democrats win the Senate majority, President Trump will remain in the White House and will block Democrats’ efforts to advance tax, climate change and health care legislation.

Most financial institutions believe the U.S. will reach the $41.5 trillion debt ceiling in mid-2027 and will need Congress to approve taking on additional debt. If Congress does not do so, the United States will be unable to borrow to pay its debts and could default.

The last time Congress raised the debt ceiling was in 2025 as part of Republicans’ massive partisan tax cuts and spending package known as the “One Big Beautiful Bill Act.” Most analysts agree that it won’t be so easy for Democrats to win again, because if they win at least one chamber, Democrats could use the opposition as leverage to elicit other policy changes.

A recent report from TD Strategies noted that Democrats are expected to win both chambers of Congress, saying, “A divided government could make the process of raising or suspending the cap particularly contentious, but a blue wave could make the process less difficult.” “We’re hopeful that the cap will eventually be raised, but we’re hopeful that the negotiations will eventually come to a conclusion.”

In 2023, this scenario played out in reverse, with Republicans controlling the House and Democrats controlling the Senate and the White House. House Republicans, then led by Speaker Kevin McCarthy (R-Calif.), pushed for spending cuts in exchange for raising the debt ceiling, pushing the U.S. to the brink of default.

Molly Brooks, one of the authors of the TD Strategies report, said the debt ceiling impasse could impact markets by increasing volatility and raising interest rates on U.S. Treasuries. This instability intensifies as the U.S. approaches the “X date,” the point at which the Treasury is no longer able to pay its obligations.

“We do expect it to be raised at some point. The only question is when and how much volatility there will be in the near term leading up to it,” Brooks said. “The interest rate on a Treasury bill maturing in that year will be higher because these investors are demanding a higher premium for that bond precisely because they believe there is some scenario or probability that they may not get their principal back if the government defaults at that time.”

Mills said he is also keeping an eye on unusual market movements during the debt ceiling fight, such as bond sales.

“There has sometimes been a perverse incentive that the worse the fight gets, the better the yields on Treasuries are, just as the very instruments that are likely to default actually benefit…The traditional strategy around debt limits is that there’s really nothing to worry about because the Treasury market is a flight to safety,” Mills said. “We always wonder how it will be different this time, but if the bond market sells off in anticipation of a debt ceiling fight, I think the market will pay far more attention to this fight than it has in the past few fights.”

Another outcome investors are watching is the possibility that the election results will be contested or postponed, keeping markets guessing about who will be in charge of Washington for the next two years.

Election nights have been especially contentious in the United States in recent cycles, particularly after President Trump’s efforts to discredit his loss to former President Joe Biden in 2020. The president is also trying to add new voter ID requirements to this year’s voting, a move that opponents say is an excuse to undermine election results and limit access to voters.

Investors have given little concrete credit for the president’s efforts, but they are clear that a delay in declaring victory could disrupt markets.

“Aside from the final outcome, one scenario that could be problematic for markets is the potential for election disruption,” TD’s report said. “Given that recent Supreme Court decisions have strengthened states’ ability to count votes after Election Day and that much of the House change is likely to occur in California, the market may not know the ultimate winner for some time.”

“In general, higher volatility weighs on riskier assets such as stocks, and if there is a flight to quality where people put money into safer government bonds in response to increased uncertainty, it could actually lead to a slight decline in interest rates,” Brooks said.

Mills said investors are hoping for a decisive victory for one side as soon as possible after the votes are counted.

“We have no intention of repeating 2020,” he said, noting how control of the Senate continued until the election was decided on January 5, 2021. “Even in the 2024 election, what we consistently heard from investors was that their No. 1 goal was to have a clear result on election night.”