Democrats' Win: Policy and Market Implications

Democrats appear poised to have at least 54, and perhaps as many as 56, seats in the Senate when the 120th Congress begins on January 3, 2027. Democrats won a Senate election in Texas for the first time since 1988, won a Senate seat in Kansas for the first time since 1932, and ousted a 30-year incumbent in Maine, among other wins.

In the House of Representatives, it will take several more days before the final margin is determined, but Democrats are on track to approach, or even exceed, 250 seats—a net increase of at least 35 seats.

The "old" Congress will return to Washington on November 9. Republicans will hold their current majorities in both chambers through the end of the year and may try to push through partisan legislation, such as a major increase in defense spending, before they lose their majority. But the dynamics of post-election sessions of Congress are notoriously tricky, because dozens of lawmakers are retiring or have just lost their re-election bid. It means motivations have changed and even attendance is unpredictable, so it may be difficult for Republicans to accomplish as much as they'd like during the remaining weeks of 2026.

One issue that must be addressed during the post-election session is government funding, which runs out on December 11. The government will shut down if no agreement to extend funding is reached by the deadline. Leaders from both chambers and both parties are reportedly negotiating a solution that would extend funding into early 2027 or perhaps even for the remainder of the entire fiscal year, which runs until September 30, 2027. But given the challenging political atmosphere, a government shutdown next month can't be ruled out.

Democrats will need to work with President Trump—who has already threatened to be "Mr. Veto" over the next two years and block the Democrats' legislative priorities. But the president also said late on election night that he "looks forward to working with [Democrats] for the good of the country." Navigating between those two perspectives will be Congressional Democrats' challenge over the next two years.

At the top of the list of issues the president and Democrats will need to work together on is increasing the debt ceiling, the Congressionally mandated cap on the total amount of debt the United States can accumulate. That cap was set at about $41.4 trillion last year. With the debt level passing $40 trillion in August, the U.S. is projected to hit the debt limit in early to mid-2027, at which time the Treasury will no longer be able to borrow.

Congress is likely to have to raise the limit by mid-year, in a debate that will have enormous political and market impact. Volatility in both the equity and bond markets typically increases the closer Congress gets to the "X date," the date on which the country would potentially default for the first time in history. While the debate will undoubtedly produce a broad national conversation about the size of the annual budget deficit and the federal debt, Congress in recent decades has shown little willingness to engage in the kind of major fiscal changes needed to slow the growth of the country's debt.

Democrats are likely to investigate the president and his family's ties to cryptocurrency. But many Democrats are also supportive of legislation to craft a regulatory framework for digital assets that includes investor protections. The two parties negotiated for more than a year over the Clarity Act, which passed the House but collapsed in the Senate in September. Expect Democrats to push next year for a version of the bill that is much tougher on cryptocurrency companies.

The Democrats' victory is also likely to put data centers on the policy agenda in 2027, something that has potentially huge implications for artificial intelligence (AI) companies and hyperscalers, the core providers of large-scale, data-intensive computing capacity.

The public backlash against data centers, the massive buildings being built to house the computer servers and other equipment that power the AI boom, was a significant factor in races across the country. Voters have been pushing back against data center construction because of concerns about the environmental impact and the potential for higher utility bills for nearby residents. Democrats on Capitol Hill are likely to push for legislation that slows the data center boom and forces companies to cover the cost of electricity and water infrastructure upgrades.

Past performance is no guarantee of future results, of course, but markets have historically performed well after the end of a midterm election, regardless of which party came out on top. The S&P 500 has been up six months after every midterm election since 1974, with an average return of 12.4% in those years, according to a Schwab Center for Financial Research analysis using historical data from Yahoo Finance.

Elections are inherently uncertain events, and markets generally don't like uncertainty. But once an election is over, markets and investors can make an assessment, based on the balance of power in Washington, about how much political and policy decisions are likely to affect the markets over the next two years. In this case, markets know that there will be two years of divided government, with a Republican in the White House and Democrats controlling both chambers of Congress. That's likely to produce gridlock in the nation's capital. Markets generally don't mind political gridlock because it limits the possibility of sweeping policy decisions that could affect companies, earnings, and the markets.

Whether you are elated or horrified by the election outcome, it's important to remember to keep those emotions out of your investment decisions. History shows that staying invested, regardless of the balance of power in Washington, tends to be the best strategy.

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