On November 3, the United States officially held midterm elections, and preliminary results indicate that the Democrats swept (Democrats sweep) with a solid outcome. According to data from Polymarket, Kalshi, and others, it is expected that the Democrats will ultimately secure 260 seats in the House of Representatives (with 218 for a majority) and 56 seats in the Senate (with 51 for a majority) (Chart 2). The prolonged situation in Iran and rising inflation have caused many voters to lose patience, leading to a significant decrease in Trump's approval ratings before the midterm elections, particularly as inflation is the issue with the lowest approval ratings (Chart 1).

Chart 1: The prolonged situation in Iran and rising inflation have caused many voters to lose patience.

Source: Silver Bullet, CITIC Research Department

Chart 2: The market expects the Democrats to 'sweep' both houses, securing 260 seats in the House and 56 seats in the Senate.

Source: Kalshi, CITIC Research Department

The advantage gained by the Democrats clearly exceeded expectations, especially with some deep red states like Texas turning blue, which was shocking. This result raised concerns in the market about Trump's policies being obstructed, increased political maneuvering, and intensified regulation of AI and cryptocurrencies. As a result, Nasdaq futures initially dropped by 2%, and cryptocurrencies and the dollar weakened as well. However, sentiment visibly rebounded afterward, with the market shifting to trade on how the Democratic-controlled Congress would constrain Trump's errors in certain policies.

In an environment where both the direction of policy advancement and progress are highly uncertain, it appears that reasons can be found for both positive and negative market performances. In reality, the influence of various issues on the same asset could be completely opposite.

In our view, the essence of asset impacts revolves around whether the focus is on correcting existing errors through checks and balances (inflation, the Iran situation, the Federal Reserve, tariffs) or if it mainly involves 'adding chaos' for the sake of opposition (AI, finance). So what has this midterm election changed? In which directions is policy advancement more likely? What implications does it have for assets?

How do midterm elections affect policy? Increased political maneuvering, more fiscal constraints, AI faces regulatory restrictions.

To understand the actual impact of the midterm elections, it is essential to first grasp the boundaries and operational mechanisms of power within the U.S. Congress and the presidency. In short, controlling both houses of Congress does not equate to being able to 'do as one pleases'; there are several checks and balances and procedural constraints in place, which leads the final outcomes to be concentrated in several areas.

Both houses of Congress have distinct powers; simply put, the House of Representatives 'controls money' (issues of budget, taxes, etc.), while the Senate 'controls people' (confirmation of presidential nominations). In terms of foreign affairs and trade, Congress has limited influence. However, the Senate has a 'special power' known as 'filibuster,' which allows the minority party to elongate the legislative process through extended speaking times, effectively obstructing the passage of bills. Thus, if a party only holds a simple majority in the Senate, such as 51 seats, it can still encounter significant challenges on many important bills. Otherwise, why has the Republican Party, currently controlling both houses, still been unable to pass the budget for the fiscal year 2027 (which began in October)? However, controlling 60 seats changes the dynamic; a relative majority of 60 can vote to end a 'filibuster.' Hence, having 60 votes is an important 'watershed'; beyond budget-related bills that can pass with a simple majority through budget reconciliation, most general bills require 60 votes to pass. Additionally, the president has a power known as 'veto,' which also makes it difficult to implement the Democratic agenda.

Combining the results of the midterm elections with the operational mechanisms of Congressional power, several points are relatively clear: 1) Trump and his supporters may face investigative pressures. After the midterm elections in 2019, the Democrats pursued Trump's impeachment, albeit symbolically (requiring a 2/3 supermajority in the Senate). 2) Fiscal maneuvering will increase. It will be very difficult for fiscal policy in 2027 to align with Trump's envisioned direction, such as impacting military actions; however, Trump can veto places where Democrats want to spend money. During this maneuvering, the risk of government shutdowns will rise (but will be negligible in substance), and the risk of hitting the debt ceiling will increase (currently estimated to reach in the second quarter of 2027), but the significance of the debt ceiling is such that no one can afford the responsibility of default, so it remains very likely to be a situation of 'more alarm than danger.' 3) AI regulation will largely depend on local levels, as federal-level legislation is very difficult. Although the overall direction is thus, the actual implementation still hinges on the outcomes and the pace of the bipartisanship, which remain uncertain.

Fiscal: Elimination of surplus resources; increasing disturbances from government shutdowns and the debt ceiling.

Congress holds the 'purse strings' of U.S. fiscal policy and is key to implementing fiscal policies; it is also the core area of bipartisan maneuvering. Currently, the two parties have substantial disagreements over fiscal issues like defense and healthcare. Although theoretically, after the Democrats control both houses, they can use the budget reconciliation process to bypass the 60 votes needed to end a filibuster, the president's veto power can significantly restrain the Democratic agenda, ultimately leading to heightened fiscal maneuvering, making implementation very challenging.

► Republican Party: Fiscal resources tilted toward defense. Trump submitted the 2027 fiscal year presidential budget in April 2026, mainly implementing proposals through annual appropriations and budget reconciliation procedures. According to estimates from CBO, Trump's plan for 2027 includes a $117 billion increase in spending, of which $98 billion is directed toward defense (Chart 3).

Chart 3: Defense spending is a major demand of Trump.

Source: CBO, CITIC Research Department

► Democratic Party: Ending geopolitical conflicts and strengthening livelihood guarantees. Appearing in the Democratic policy agenda, they advocate restoring healthcare protections (like the ACA and Medicaid), ending military actions against Iran, eliminating tariff policies, lowering living costs, and increasing oversight on Trump, contrasting sharply with the policy orientations expressed in Trump's presidential budget and the Great American Beautiful Act.

Will the new Congress led by the Democrats influence the 2027 fiscal policy? From the end of the midterm elections (November 3, 2026) to when the new Congress takes office (January 3, 2027) is referred to as the 'lame-duck session,' during which the Republicans will still control both houses. If the Republicans can legislate major annual appropriations and new spending plans for the fiscal year 2027 during this period (i.e., obtaining passage in both houses and receiving presidential signature), then even a Democratic victory in the midterms will have limited impact on the 2027 fiscal policy. However, the current Congress has fallen behind in legislative progress, and some fiscal disputes may need to be resolved by the new Congress (Chart 4).

Chart 4: Progress on Trump's annual appropriations and budget reconciliation bills is slow.

Source: CBO, CRS, CITIC Research Department

► Annual appropriations: Before the midterm elections, only 3 out of 12 annual appropriations bills passed a full House vote, and none passed a full Senate vote, significantly lagging behind the past three midterm election years (Chart 5).

Chart 5: Trump's annual appropriations progress lags behind the past three midterm election years.

Source: Government Shutdown Tracker, CRS, CITIC Research Department

► Budget reconciliation procedures: Trump aims to push a third round of budget reconciliation legislation (Reconciliation 3.0) to realize his fiscal demands. However, looking back at the first two rounds of budget reconciliation, it took 85 days for the budget resolution to pass both houses and become law for the Great American Beautiful Act (OBBBA), and 42 days for the Secure America Act (Chart 6). Currently, the budget resolution, which is the preliminary step for Reconciliation 3.0, has not yet been passed by both houses.

Chart 6: The legislative progress of Reconciliation 3.0 is significantly delayed.

Note: The additional defense funding scale for Reconciliation 3.0 is as proposed by the White House.

Due to the heightened maneuvering around fiscal legislation between the two parties, we highlight the increased likelihood of a 'government shutdown' and 'debt ceiling' risks.

► Government shutdown: The chances of extending the continuing resolution (CR) in December are significant, but the risk of a government shutdown will rise in the first half of next year. This Congress has failed to pass the annual appropriations bills before the start of the 2027 fiscal year; Trump signed a temporary appropriations bill on September 2 (continuing resolution, CR) to extend existing appropriations arrangements until December 11. By that time, the new Congress will not yet have taken office, and the Republicans will still dominate both houses, making it more likely to successfully pass a new round of CR. However, if the new CR extends the appropriations deadline until the new Congress takes office (the average duration of a CR is 118 days), then as the Democrats lead Congress, the fiscal differences between the two parties may widen further, potentially leading to a government shutdown risk in the first half of next year.

► Debt ceiling: We estimate that the U.S. will hit the debt ceiling in the second quarter of 2027, corresponding to the X-date (when funds run out) in the fourth quarter of 2027. In July 2025, the Great American Beautiful Act raised the debt ceiling by $5 trillion to $41.1 trillion. As of October 28, the public debt subject to the limit reached $40.4 trillion, once again approaching the limit (Chart 7). Assuming that the deficit rate for the fiscal year 2027 remains roughly stable, and that by the time the limit is reached, the TGA balance declines by 25% compared to the end of 2026, then the U.S. will hit the limit in the second quarter of 2027. According to BPC estimates, after hitting the limit, it will take about 6-9 months for the funds to run out, meaning the X-date will be around the fourth quarter of 2027.

Chart 7: By the end of September, the U.S. public debt subject to the debt ceiling reached $39.98 trillion, nearing the $41.10 trillion limit.

Source: Haver, CITIC Research Department

With both parties restraining each other, resistance to fiscal implementation is rising. We expect that the deficit rate for 2027 could remain stable or expand slightly. In a scenario of continued existing policies, we expect the U.S. deficit rate to decrease slightly from 6.18% in the fiscal year 2026 to 6.14% in the fiscal year 2027. If all new spending in the presidential budget is realized, it could rise to 6.52% (Chart 8). Considering that defense spending occupies a significant proportion in the presidential budget (CBO estimates that the tilt ratio in the 2027 budget will reach 84%), which is notably at odds with the Democrats' ideologies, we find it challenging for fiscal policy to realize as Trump envisions. However, the Democrats are also constrained, ultimately leading to the likelihood of the 2027 fiscal policy converging toward existing policies.

Chart 8: In 2027, if current policy is maintained, the U.S. deficit rate will fall to 6.1%, while consideration of the presidential budget raises it to 6.5%.

Source: Haver, CITIC Research Department

Military: The new Congress can impose constraints on Trump by limiting new military spending and investigations.

Congress has limited direct constraints on the president regarding foreign affairs and military actions. As the commander-in-chief of the U.S. military, the president enjoys substantial autonomy in executing military operations, mainly relying on war authorizations and legislative limitations to exert control from Congress. However, in practice, the president can set regulations to evade some of Congress's constraints. In the conflict with Iran, the Trump administration claimed that an April ceasefire, indicating the termination of hostile actions, meant the 60-day limit stipulated by the War Powers Resolution was no longer applicable, and after resuming military actions in July, they recalibrated the deadline, thereby circumventing Congressional opposition.

The new Congress can limit new military spending to check Trump. Defense spending is a significant demand of the 2027 presidential budget, with Trump hoping to increase defense funding by $251 billion through annual appropriations and arrange an additional $350 billion for defense through the budget reconciliation process (Chart 3). Currently, progress on these two legislative processes is slowing down, lagging behind previous midterm election years (Charts 5 and 6), and will likely need to be reviewed by the new Congress led by the Democrats.

AI: The Democratic Party also supports AI, with differences in regulatory intensity; federal-level legislation is difficult, but local governments may tighten regulations.

AI significantly contributes to U.S. growth and corporate profits, and the Democratic Party similarly supports AI development. In the second quarter, the U.S. real GDP grew at an annualized rate of 2.2%, with AI-related demand (AI production investment and infrastructure) contributing 28% to U.S. growth, driving approximately 0.6 percentage points (Chart 9); additionally, AI-related sectors contributed 53% to U.S. stock market growth (Chart 10). Therefore, both parties have an interest in promoting AI innovation. In December 2025, House Democratic leader Jeffries stated that American AI companies should continue to develop and established the "AI and Innovation Economy Commission" to research policies. In February 2026, Senate Democrats and Republicans jointly proposed the "Future AI Innovation Act" to support AI R&D and maintain the technological leadership of the United States.

Chart 9: In the second quarter, the U.S. real GDP grew at an annualized rate of 2.2%, with AI-related demand contributing 28% to growth.

Source: Haver, CITIC Research Department

Chart 10: In the second quarter of 2026, AI contributed 53% to overall profit growth.

Source: Bloomberg, CITIC Research Department

The main divergence between the two parties lies in the intensity of AI regulation; the Democratic Party faces significant challenges in proposing federal-level bills that strengthen regulation. In the Trump administration's AI legislative framework, it advocated for relying on existing regulatory agencies and industry standards for oversight and opposed the establishment of new federal AI regulatory agencies. In contrast, the Democrats place greater emphasis on strengthening regulation, with Senate Democratic chief member Cantwell proposing enforceable safety standards for advanced models and requiring independent audits before covered models are released. However, even with a Democratic sweep in both houses, pushing for regulatory bills will still face difficulties, as bills may be vetoed by the president after passing both houses, and overturning a presidential veto requires support from two-thirds of the voting members in both houses.

At the local government level, candidates from both parties generally tend to tighten regulations on AI data centers. According to DC Byte data, the five states with the most concentrated AI data centers in the U.S. are Texas, Georgia, Virginia, Ohio, and Pennsylvania (Chart 11). Among these, Virginia does not have a gubernatorial election this year, but candidates from the other four states are inclined to strengthen regulation on AI data centers and even pause construction (Chart 12). From the measures already in place, local governments may impose restrictions on AI data center constructions regarding electricity costs, tax incentives, and land use.

Chart 11: The five states with the most concentrated data centers are Texas, Georgia, Virginia, Ohio, and Pennsylvania.

Source: BloombergNEF, DC Byte, CITIC Research Department

Chart 12: Candidates from both parties advocate tightening AI data center regulations, showing little difference in position.

Source: Multistate, CITIC Research Department

How does the Democratic sweep impact assets? Focus on the four channels of influence: government shutdown, debt ceiling, fiscal policy, and AI regulation.

The same policy does not have a uniform impact on different assets; the short-term and long-term effects may even be opposite. For instance, the rise of political maneuvering can stimulate demand for safe havens; fiscal expansion limitations can generally favor U.S. Treasuries, but spending rigidity and default risks can place pressure on U.S. Treasuries and the dollar; personnel appointments being obstructed may actually benefit the Federal Reserve's independence; while the direction of AI and cryptocurrency regulation is clear, the pace of implementation remains uncertain; and premature cessation of military actions could favor oil prices, inflation, and interest rates falling (Chart 13).

Chart 13: The midterm elections influence asset performance through different channels.

Source: CITIC Research Department

Ultimately, the core influence on asset pricing hinges on whether the market's dominant force is aimed at 'correcting' through checks and balances (inflation, the Iran situation, the Federal Reserve, tariffs), or disruptions aimed at 'opposing for the sake of opposition' (AI, finance).

We tend to believe that in the short term, the former predominates, which is also why most U.S. stocks have risen after the midterm elections (Chart 14); at this moment, U.S. stocks still have support, while U.S. Treasury yields and the dollar have weakened slightly. However, the risks posed by the latter may rise with time, as the closer we get to the 2028 election, the more intense the political maneuvering will become. Especially if AI lacks breakthroughs while the Federal Reserve cannot lower interest rates, if so, U.S. stocks, U.S. Treasuries, and the dollar will all face pressure.

Chart 14: In the past 50 years, U.S. stocks have mostly risen after midterm elections.

Source: Bloomberg, CITIC Research Department

Specifically:

► Government shutdown: The impact on the market is limited, potentially temporarily boosting risk-averse sentiments. Based on historical experience, during the past 21 government shutdowns, the median fluctuations of the S&P 500, 10-year U.S. Treasury yield, and dollar index were all near zero (Chart 15). We believe that the impact of a government shutdown is limited to emotional levels and may favor risk-averse assets in the short term, but do not anticipate a lasting impact.

Chart 15: Government shutdowns have little impact on assets.

Source: Wind, CITIC Research Department

► Debt ceiling: Upon reaching the limit (second quarter of 2027), it could actually improve liquidity, favoring bonds and U.S. stocks. At this point, the Treasury will not only stop issuing new debt to reduce the supply of bonds but will also use the cash from the TGA account to cover expenses, achieving a 'liquidity injection' effect (Chart 16), which can provide marginal support for bonds and U.S. stocks.

Chart 16: The TGA consumption phase could provide support for liquidity.

Source: Bloomberg, CITIC Research Department

However, after the limit is resolved (fourth quarter of 2027), the supply of bonds and liquidity will face short-term pressure, hindering term premiums and U.S. stock performance. After reaching an agreement between the two parties, the Treasury will need to reissue debt to replenish the TGA account, resulting in a temporary increase in bond supplies and withdrawing part of liquidity. Review of 2023 and 2025: 1) On the bond issuance side, the net issuance scale of government bonds during the third quarter of two years reached $1.01 trillion and $1.06 trillion, with structural supply pressure focusing on the short end, with short-term bond issuances reaching $794 billion and $613 billion respectively (Chart 18). During the same periods, the term premiums for U.S. Treasuries rose rapidly or remained high, with temporary pressures lasting for about a quarter (Chart 19). 2) On the liquidity side, within three months after the debt ceiling constraints are lifted, TGA balances increased by $404 billion and $447 billion respectively, equivalent to 7-9% of the U.S. liquidity scale at that time (Chart 16), thereby marginally pressuring risk assets like U.S. stocks.

Chart 17: In September 2026, the proportion of tradable government bonds maturing within a year was approximately 33.4%, so rollover pressures remain stable.

Source: TBAC, CITIC Research Department

Chart 18: To replenish the TGA account, the scale of issued debt exceeded $1 trillion in the third quarters of 2023 and 2025.

Source: Haver, CITIC Research Department

Chart 19: Following the resolution of the debt ceiling, term premiums for U.S. Treasuries rose rapidly or remained high, with temporary pressures lasting for about a quarter.

Source: Bloomberg, CITIC Research Department

► Fiscal: Marginally reduced bond issuance pressure, but unfavorably impacting traditional demand and recovery of cyclical sectors' profits. After the midterm elections, the escalating maneuvering between both parties may limit the fiscal expansion space. Coupled with the stable proportion of tradable government bonds maturing in the next year (Chart 17), rollover pressures are controllable, and we expect that the supply pressure on U.S. Treasuries may weaken. However, at the same time, fiscal support for growth will also diminish, particularly concerning traditional demand, which is more sensitive to government investment and purchasing power, potentially restricting the profit recovery of cyclical sectors.

► AI: The key still depends on AI progress, but local regulation may exacerbate disturbances. Given the current lack of clear advancements in AI models and applications, market expectations are at a 'transitional phase,' in addition to high capital expenditures continually squeezing cash flow for cloud providers, resulting in heightened concerns over the speed of AI revenue realization and returns on investments. The AI pressure index we constructed has also deteriorated continuously since the end of September (Chart 20). If local governments further tighten regulations, raising the cost of AI investments, it may escalate market concerns and trigger temporary disturbances.

Chart 20: Our constructed AI pressure index has continuously worsened since the end of September.

Source: Bloomberg, FactSet, CITIC Research Department

[1]https://apnews.com/article/c9a0ffa1ec3cd599f9bc304ae26268a2

[2]https://www.reuters.com/article/world/us-senate-acquits-trump-in-historic-vote-as-re-election-campaign-looms-idUSKBN1ZZ1AR/

[3]https://apnews.com/article/midterm-elections-democrats-affordability-corruption-018019529b14a6b3bc4a343a4e17c44f

[4]https://www.everycrsreport.com/reports/R46595.html

[5]In January 2023 and January 2025, when hitting the debt ceiling, the TGA balance decreased by about 25% compared to three to four months prior; the TGA balance at the end of 2026 is based on TBAC forecasts.

[6]https://bipartisanpolicy.org/article/when-will-we-reach-the-debt-limit-again/

[7]https://www.cbo.gov/publication/62546

[8]https://www.reuters.com/world/middle-east/war-powers-resolution-purposes-us-hostilities-with-iran-that-began-february-have-2026-05-01/

[9]https://www.reuters.com/world/us/trump-sends-congress-formal-notice-that-iran-conflict-has-resumed-2026-07-13/

[10]https://democrats-science.house.gov/news/press-releases/leader-jeffries-announces-new-house-democratic-commission-on-ai-and-the-innovation-economy

[11]https://www.commerce.senate.gov/press/dem/release/cantwell-young-hickenlooper-and-blackburn-reintroduce-bill-to-ensure-u-s-leads-global-ai-innovation/

[12]https://www.whitehouse.gov/wp-content/uploads/2026/03/03.20.26-National-Policy-Framework-for-Artificial-Intelligence-Legislative-Recommendations.pdf

[13]https://www.commerce.senate.gov/press/dem/release/cantwell-outlines-comprehensive-governance-framework-for-safe-and-secure-frontier-ai/

[14]https://www.congress.gov/crs_external_products/RS/PDF/RS22654/RS22654.8.pdf

[15]https://gov.texas.gov/news/post/governor-abbott-directs-puc-and-ercot-to-shield-texans-from-data-center-infrastructure-costs

[16]https://law.lis.virginia.gov/vacodeupdates/title15.2/section15.2-2209.5/

[17]https://www.azleg.gov/legtext/57leg/2R/laws/0140.pdf

Source

This article is excerpted from "The Asset Implications of the Democratic 'Sweep'" published on November 5, 2026.

Liu Gang, CFA Analyst SAC License No.: S0080512030003 SFC CE Ref: AVH867

Hao Yuening Contact Person SAC License No.: S0080125070024

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