Reconciliation or belligerance?

The results of the US midterm elections left no doubt: the Democrats swept the House and the Senate, leaving the Republican party deeply wounded. President Trump, top White House aides and other members of the administration’s inner circle are likely to find themselves under investigation and subpoena by the Democrats for corruption. However, despite the expected intensive oversight and investigations, a full-scale impeachment of Trump himself is not an immediate priority for the Democrats. 

Although the midterms have shifted the needle in American politics, whether or not this will actually repress President Trump’s actions moving forward is increasingly doubtful. Congress reconvenes this week, with the new Democrat-led Congress not set to enter until January. This means that the Republicans and President Trump will seek to push through as many legislative acts and appointments as possible including keeping the federal government open as funding is set to run out on 11 December. A continuing resolution is the most likely outcome for the budget. 

Importantly, although there are signs that, while accepting that the war with Iran and the severe approach to immigration taken by his administration put off some voters, President Trump appears to actually be doubling down on his vision about the future of the US. One clear signal is the appointment of his hardline aide, Stephen Miller, as White House chief of staff, starting today. Miller is particularly known as the primary driving force behind Trump's strict border and immigration agenda.

Even when the new Congress comes in January the President still holds a few cards. Among these are his veto over Congress and it will be one of his key tools in thwarting the Democrats. Although Congress can override Trump’s veto with a two-thirds majority, 290 votes in the House and 67 votes in the Senate, it is unlikely that Republican cooperation will be forthcoming. 

However, the Democrats will have the ability to block Trump’s appointees, which move  through a Senate committee and then the entire chamber. These appointments can be confirmed or blocked with a simple majority vote. This is one of the reasons why these few weeks between the old and new Congress may become ever more crucial; there are, for example, rumours of resignations in the Supreme Court so that younger Republican-associated nominees can be appointed to these lifetime roles.

So what does this all mean for markets? We saw the immediate aftermath of the midterm election results, with AI associated stocks dropping dramatically, forcing the Nasdaq into contractionary territory and the biggest one-day drop for the S&P technology sector in over six years, on fears that Democratic state governors and a Democrat-led Congress will slow or attempt to stop the AI buildout. However, given the growing significance of AI in US competitiveness, its productivity and, in terms of spending, in GDP growth, this fear may have been overblown. As noted by Reuters, some of the biggest AI winners are still logging significant year-to-date gains despite their recent slides. For example, shares of Sandisk remained up about 250% in 2026, while Dell Technologies was last up about 160% and Micron Technology had gained 140%. 

Major fiscal shifts still look improbable over the next two years. Deficits are likely to remain high, extending risk premia, while the 2027 debt ceiling adds a separate source of funding-market volatility. Equities could also still be subject to changes in tariff policies under President Trump as the Democrats will be unable to remove that tool from the President’s grip. Selective concessions could be outweighed by renewed executive action, leaving import-sensitive margins exposed. 

This midterm election had two separate impacts. Domestically it raised the prospect of political gridlock, even more difficult budget negotiations, and potential government shutdowns. Internationally the midterms left markets and governments uncertain about how President Trump will act now. The G7 foreign ministers are gathering in Paris today to try to understand whether this defeat will greatly alter the administration’s approach to the war in Ukraine, to its dealings with Russia, to its partners in the Middle East, to Iran, to its working relationship with China and to the demands and expectations he is placing on the European members of NATO.

The election has not fundamentally changed the strategic priorities of the United States. Although the new Democrat-led congress may try to advocate for more support to Ukraine and continuing sanctions on Russia, the President may sidestep this with his veto. Importantly, the gradual reduction in US engagement with Europe and its increasing rivalry with China will not change. Even if Trump continues to negotiate with Iran, he still has existing funds and broad powers to conduct military operations. Additionally, the situation around oil and gas deliveries will not rapidly change, even over the next few months. As we noted in our Daily on 5 November, although recovering Gulf exports have pushed the market back into surplus, this should not be confused with restored resilience, particularly when depleted inventories leave little protection against renewed disruption.

Across the GCC, repairing damaged energy infrastructure and restoring supply security remain lengthy undertakings.

Beyond the Democrats' celebrations last week, the one thing that is clear is that President Trump may take the expected restrictions by the Democrats on his ability to implement domestic policies as an opportunity to engage in even more foreign policy activity. This is where the greatest risk, with a heightened likelihood of grey and black swan events, may threaten markets. 

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