Introduction
In this midterm election, the Democrats swept both houses, and even some deep red states (like Texas) turned blue, significantly exceeding market expectations. Based on the results of the midterm elections and the distribution of power in Congress, several points are relatively clear:
1) Trump and his supporters may face investigative pressure. After the 2019 midterm elections, the Democrats pushed for Trump's impeachment, although it was only symbolic.
2) The financial game intensifies. It will be challenging to implement the 2027 budget in the direction that Trump desires (such as defense spending); however, Trump can also veto areas where the Democrats want to spend money. During the negotiation process, government shutdowns may increase (though with no substantive impact), and the risk of a debt ceiling may also rise (estimated to hit in the second quarter of 2027), but it is highly likely to be "a storm in a teacup."
3) AI regulation risks are at the local government level, which is worth watching, while it is difficult to legislate at the federal level.
In reality, a closer look reveals that many Democratic issues may have completely opposite effects on the same asset. Ultimately, the impact essentially depends on whether it is about correcting the existing "errors" (inflation, Iran, the Federal Reserve, tariffs), or simply " добавление трудных " (AI, finance) for the sake of opposition. In the short term, it may be the former, but as time goes on, the risks of the latter will gradually emerge.
From observations of performance over the past two days, it seems the market's trading resistance is the least regarding Hengke and gold. 1) Hengke has minimal exposure to AI risks, and concerns about AI risks are not too pressing; expectations of a decrease in geopolitical risks could lower oil prices and inflationary pressures; 2) Gold benefits from the rising political game risks and could also benefit from the decline in oil prices and inflation easing interest rate pressure, along with a weakening dollar and U.S. Treasury yields.
Hengke's original problems are not due to external factors but internal ones, with the "advantage" being a sufficiently low and minimal AI exposure. Solely relying on the improvement of the external environment and the rebound from capital reallocation faces resistance from fundamental pressures and the further escalation of geopolitical risks; during the rebound process, significant net selling occurred in the southern direction, with short-selling volumes increasing, indicating substantial disagreement. In contrast, gold faces somewhat less resistance, as several directions remain relatively smooth.
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Main Text
On November 3, the U.S. midterm election officially votes, and preliminary results show that the Democrats sweep (Democrats sweep) is essentially "set in stone." According to data from Polymarket, Kalshi, and others, the Democrats are expected to ultimately secure 260 seats in the House of Representatives (218 for a majority) and 56 seats in the Senate (51 for a majority) (Chart 2). The prolonged situation in Iran and rising inflation have caused many voters to lose patience, and Trump's approval ratings had been declining significantly before the midterm elections, particularly as inflation was the most unpopular issue (Chart 1).
Chart 1: Prolonged situation in Iran and rising inflation have caused many voters to lose patience
Source: Silver Bullet, China International Capital Corporation Research Department
Chart 2: Market expects Democrats to "sweep" both houses, securing 260 seats in the House and 56 seats in the Senate
Source: Kalshi, China International Capital Corporation Research Department
The advantage garnered by the Democrats has clearly exceeded expectations, especially as some deep red states like Texas turned blue [1], which was quite surprising. This result sparked market concerns over potential obstacles to Trump's policies, increased political gamesmanship, and intensified regulation of AI and cryptocurrencies. Consequently, Nasdaq futures temporarily dropped by 2%, while cryptocurrencies and the dollar also weakened. However, the sentiment subsequently improved significantly, and the market shifted to trading against the idea that the Democrats in Congress might constrain Trump's "mistakes" on certain policies.
In a context where the push for policy direction and progress is highly uncertain, both positive and negative market reactions seem to find justification. In fact, different issues in the midterm elections may have completely opposing effects on the same asset.
From our perspective, the nature of the impact on assets is about identifying whether the primary focus is on correcting existing errors (inflation, Iran's situation, the Federal Reserve, tariffs) or creating "chaos for the sake of opposition" ( AI, finance). So what has this midterm election changed? Which directions are more likely to see policy progress? What implications does this have for assets?
How do midterm elections affect policy? Increased political gamesmanship, heightened financial constraints, and regulatory restrictions on AI
To understand the actual impact of the midterm elections, one must first grasp the boundaries and operational mechanisms of power between the U.S. Congress and the President. In brief, controlling both chambers of Congress does not equate to "doing as one pleases," as there are still many checks and balances and procedural limitations, resulting in the final outcomes concentrating mainly in a few areas.
Both chambers of Congress have their respective emphases: simply put, the House of Representatives "controls the money" (budget, taxation, etc.), while the Senate "controls the people" (presidential nominee confirmations). In terms of foreign affairs and trade, Congress has limited authority. However, the Senate possesses a "special power" known as "filibuster," where the minority party can use prolonged speaking to make legislative processes long-winded, effectively obstructing the passage of bills. Therefore, if one party merely holds a simple majority in the Senate, such as 51 seats, it will still face significant difficulties regarding many important bills. Otherwise, why have Republicans, currently controlling both houses of Congress, been unable to pass the budget for fiscal year 2027 (which began in October)? But controlling 60 seats makes a difference; a relative majority of 60 seats can vote to end a "filibuster." Thus, 60 votes represent an important "watershed," with budget-related bills able to pass through the budget reconciliation process with a simple majority, while general bills require 60 votes to pass. In addition, the President has a power known as the "veto power," which also complicates the implementation of the Democratic agenda.
Combining the results of the midterm elections with the operational mechanism of congressional power, several points are relatively clear: 1) Trump and his supporters may face investigative pressure. After the 2019 midterm elections [2], the Democrats pushed for Trump's impeachment, although it was only symbolic (requiring a 2/3 supermajority in the Senate). 2) Financial gamesmanship intensifies. Implementing the 2027 budget in the direction anticipated by Trump is incredibly difficult, such as impacting military actions; however, Trump can veto areas where the Democrats want to spend money. During the negotiation process, government shutdown risks will increase (though they have minimal substantive impact), the risk of hitting the debt ceiling will rise (estimated to occur in the second quarter of 2027), but the risk of the debt ceiling is so significant that no one can bear the consequences of a default, so it is highly probable that it will still be "a storm in a teacup." 3) AI regulation will mainly focus on local governments, as legislative difficulty at the federal level is significant. Although this is the overall direction, it still depends on the outcome of the bipartisan negotiations and its implementation speed, making it uncertain.
Finance: Intensified gamesmanship, difficulty in financial expansion; increased risks of government shutdown and debt ceiling disturbances.
Congress controls the "purse" of the U.S. finance and is the key to the implementation of fiscal policy, as well as the core area of bipartisan negotiations. Currently, both parties have significant differences on fiscal issues concerning defense and healthcare. Although, in theory, the Democrats controlling both chambers can bypass the lengthy "filibuster" requiring 60 votes through the budget reconciliation process, Trump's veto power can still exert considerable restraint on the Democratic agenda, ultimately leading to more intense financial gamesmanship and making implementation difficult.
► Republicans: Financial resources tilted towards defense. Trump submitted the 2027 fiscal year's presidential budget in April 2026, primarily implementing proposals through annual appropriations and the budget reconciliation process. According to CBO estimates, Trump plans to increase spending in 2027 by 117 billion dollars, with 98 billion dollars aimed at the defense sector (Chart 3).
Chart 3: Defense spending is one of Trump's significant demands
Source: CBO, China International Capital Corporation Research Department
► Democrats: End geopolitical conflicts and strengthen social welfare. From the Democratic agenda [3], they advocate restoring healthcare protections (such as ACA and Medicaid), ending military actions against Iran, canceling tariff policies, reducing living costs, and enhancing oversight on Trump, clearly differing from Trump's policy inclination as reflected in his presidential budget and the "Great American Beautification" Act.
Will the Democrat-led new Congress impact fiscal year 2027? From the end of the midterm elections (November 3, 2026) until the new Congress takes office (January 3, 2027), this period is referred to as the "lame duck session," during which both chambers are still controlled by the Republicans. If the Republicans can pass the major annual appropriations and new spending proposals for fiscal year 2027 during this period (meaning they obtain passage in both chambers and are signed by the President), then even if the Democrats have a significant victory in the midterms, their impact on the 2027 finances will be limited. However, the current Congress's legislative progress is lagging, 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, China International Capital Corporation Research Department
► Annual appropriations: Before the midterm elections, only 3 of the 12 annual appropriations bills passed the full House vote, and none passed the full Senate vote, showing significant delays compared to previous 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, China International Capital Corporation Research Department
► Budget reconciliation process: Trump hopes to promote a third round of budget reconciliation legislation (Reconciliation 3.0) to realize his financial demands. However, reviewing the previous two rounds of the budget reconciliation process, from the passage of budget resolutions through both chambers to being signed into law, the "Great American Beautification Act" (OBBBA) took 85 days, while the "Secure America Act" took 42 days (Chart 6). Currently, as the preliminary step for Reconciliation 3.0, the budget resolution has not yet been passed by both chambers.
Chart 6: The legislative process for Reconciliation 3.0 is significantly delayed
Note: The newly proposed defense funding scale in Reconciliation 3.0 is as per the White House's proposal
Source:
As the gamesmanship around fiscal legislation between the two parties intensifies, we indicate that the probability of "government shutdowns" and "debt ceiling" is on the rise.
► Government shutdown: The possibility of a CR extension in December is relatively large, but the risks of a government shutdown are increasing in the first half of next year. The current Congress failed to pass the annual appropriations bills before the start of fiscal year 2027, and Trump signed a temporary appropriations bill (continuing resolution, CR) on September 2, extending the current appropriations until December 11. By that time, the new Congress will not yet be in session, and the Republicans will continue to control both chambers, making it likely that a new round of CR will pass smoothly. However, if the new CR extends the funding deadline until the new Congress takes office (with an average CR duration of 118 days [4]), then with the Democrats taking control of Congress, the fiscal differences between the two parties may widen further, and the risk of a government shutdown may erupt in the first half of next year.
► Debt ceiling: We estimate that the U.S. will hit its debt ceiling in the second quarter of 2027, corresponding to Q4 2027 reaching the X-date (exhaustion of funds). In July 2025, the "Great American Beautification Act" raised the debt ceiling by 5 trillion dollars to 41.1 trillion dollars (“After the Great American Beautification Act: U.S. Treasuries, U.S. Stocks, and Liquidity). As of October 28, constrained public debt reached 40.4 trillion dollars, approaching the limit again (Chart 7). Assuming the deficit rate for fiscal year 2027 remains relatively stable and that when the ceiling is hit, TGA balances are 25% lower than at the end of 2026 [5], then the U.S. will hit the limit in the second quarter of 2027. According to estimates by BPC, roughly 6-9 months after hitting the ceiling, funds will be exhausted, which would mean the X-date is around Q4 2027 [6].
Chart 7: By the end of September, public debt constrained by the debt ceiling reached 39.98 trillion dollars, nearing the limit of 41.10 trillion dollars
Source: Haver, China International Capital Corporation Research Department
With both parties restraining each other, the barriers to fiscal implementation are raised, and we expect the deficit rate in 2027 may stay stable or expand slightly. Under the scenario of continuing current policies, we estimate the U.S. deficit rate will drop slightly from 6.18% in fiscal year 2026 to 6.14% in fiscal year 2027; if all the new spending outlined in the presidential budget is realized, it may rise to 6.52% (Chart 8). Considering that defense spending makes up a significant portion of the presidential budget (CBO estimates the tilt ratio in the 2027 budget reaches 84% [7]), which diverges significantly from Democratic principles, we believe it will be challenging for the fiscal policy to be implemented as Trump the envisioned. However, the Democrats also face restraint, leading to the possibility that the 2027 fiscal policy may converge towards current policies.
Chart 8: In 2027, if current policies are continued, the U.S. deficit rate decreases to 6.1%, while considering the presidential budget, it rises to 6.5%
Source: Haver, China International Capital Corporation Research Department
Military: The new Congress passing restrictions on additional military spending and investigations imposes constraints.
Congress has limited direct constraints on the president regarding foreign and military affairs. As the Commander-in-Chief of the U.S. military, the president has significant autonomy in executing military operations; Congress mainly imposes constraints through war authorizations, legislative restrictions, and so on. In reality, however, the president can often find ways to circumvent some Congressional restrictions. During the conflict with Iran, the Trump administration claimed that the April ceasefire indicated the cessation of hostile actions, arguing that the 60-day deadline established by the War Powers Resolution no longer applied [8], and after military actions resumed in July, re-calculated the timeframe [9], thus bypassing Congress's opposition.
The new Congress could impose restrictions on new military spending to balance Trump. Defense spending is one of the major demands in the President's 2027 fiscal budget, as Trump hopes to increase defense funding by 251 billion dollars through annual appropriations and arrange an additional 350 billion dollars in defense spending through budget reconciliation (Chart 3). Currently, both legislative processes are progressing slowly, lagging behind previous midterm election years (Charts 5, 6), and are likely to be approved by the new Congress led by the Democrats.
AI: The Democrats also support AI, with disagreements regarding the intensity of regulation; federal-level legislation is difficult, but local governments may tighten regulation.
AI contributes significantly to U.S. growth and corporate profits, and the Democrats also support the development of AI. In the second quarter, real GDP in the U.S. grew at an annualized rate of 2.2%, with broad AI demand (AI production investment and infrastructure) contributing 28% to U.S. growth, pushing it up by approximately 0.6 percentage points (Chart 9); in addition, AI-related sectors contributed 53% to the growth of U.S. stocks (Chart 10). Therefore, both parties have the will to promote AI innovation. In December 2025, House Democratic leaders Jeffries stated that U.S. AI companies should continue to develop, forming the "AI and Innovation Economy Commission" to study policies [10]. In February 2026, Senate Democrats alongside Republican senators jointly proposed the "Future AI Innovation Act," supporting AI research and maintaining the U.S.'s technological lead [11].
Chart 9: In the second quarter, the real GDP of the U.S. grew at an annualized rate of 2.2%, and AI-related demand contributed 28% to growth
Source: Haver, China International Capital Corporation Research Department
Chart 10: In Q2 2026, AI contributed 53% to the overall profit growth rate
Source: Bloomberg, China International Capital Corporation Research Department
The main disagreement between the two parties lies in the intensity of AI regulation, and it is challenging for the Democrats to push federal-level legislation to strengthen regulation. In the AI legislative framework of the Trump administration, it advocates relying on existing regulatory agencies and industry standards for oversight and opposes establishing a new federal AI regulatory body [12]. In contrast, the Democrats focus more on enhancing regulation, with Chief Senate Democrat Cantwell proposing to establish enforceable safety standards for frontier models and requiring covered models to pass independent audits before release [13]. However, even if the Democrats sweep both chambers, pushing regulatory bills still has its difficulties, as bills may be vetoed by the president after passing both chambers, and overturning a presidential veto requires a two-thirds majority of votes in both chambers [14].
However, at the local government level, both parties' gubernatorial candidates generally tend to tighten regulations on AI data centers. According to DC Byte data, the five states with the highest concentration of AI data centers in the U.S. are Texas, Georgia, Virginia, Ohio, and Pennsylvania (Chart 11). Among these, Virginia does not have gubernatorial elections this year, while the candidates in the remaining four states tend to strengthen oversight of AI data centers and even pause construction (Chart 12). Based on existing measures, local governments may constrain AI data center development in aspects like electricity costs[15], tax incentives[16], and land use[17].
Chart 11: The five states with the highest concentration of data centers are Texas, Georgia, Virginia, Ohio, and Pennsylvania
Source: BloombergNEF, DC Byte, China International Capital Corporation Research Department
Chart 12: Candidates from both parties advocate tightening regulations on AI data centers, with little difference in positions
Source: Multistate, China International Capital Corporation Research Department
How does the Democratic sweep impact assets? Focus on four influence channels: government shutdowns, debt ceiling, finance, and AI regulations.
The impact of the same policy on different assets is not consistent, and short-term and long-term effects may also be opposite. For example, increased political gamesmanship can elevate risk-averse demand; limited fiscal expansion generally benefits U.S. Treasuries, but rigidity in spending and default risks can exert pressure on U.S. Treasuries and the dollar; personnel appointments being obstructed can conversely benefit the Federal Reserve's independence; although the direction for AI and cryptocurrency regulation is clear, the pace of implementation remains uncertain; military actions ending early may favor a drop in oil prices, inflation, and interest rates (Chart 13).
Chart 13: The midterm elections influence asset performance through various channels
Source: China International Capital Corporation Research Department
Ultimately, the core influence on asset pricing: depends on whether the market's driving force is aimed at "corrective actions" (inflation, Iran's situation, the Federal Reserve, tariffs) or disruptions oriented towards "opposing for the sake of opposition" (AI, finance).
We tend to believe that, in the short term, the former predominates, which is also the reason why U.S. stocks rose after the midterm election (Chart 14), at this moment, U.S. stocks still have support, while U.S. Treasury yields and the dollar slightly weaken. However, the risks brought by the latter may also rise over time, especially as the 2028 election approaches and political gamesmanship intensifies, particularly in scenarios where AI lacks breakthroughs and the Federal Reserve cannot cut interest rates. If that's the case, both U.S. stocks and bonds along with the dollar will face pressure.
Chart 14: Over the past 50 years, U.S. stocks have mostly risen after midterm elections
Source: Bloomberg, China International Capital Corporation Research Department
Specifically:
► Government shutdown: The market impact is limited and may stage a temporary rise in risk-averse sentiment. Based on historical experience, during the past 21 government shutdowns, the median fluctuations of the S&P 500, 10-year U.S. Treasury yields, and the dollar index were close to zero (Chart 15). We believe that the impact of government shutdowns is only limited to emotional levels and may favor risk-averse assets in the short term, but it does not have sustained effects.
Chart 15: Government shutdowns have a small impact on assets
Source: Wind, China International Capital Corporation Research Department
► Debt ceiling: When the ceiling is first reached (Q2 2027), liquidity may improve, benefiting bonds and U.S. stocks. At this time, the Treasury will not only cease issuing bonds to reduce supply but also draw on cash from the TGA account to cover expenses, achieving the effect of "providing liquidity" (Chart 16), which can provide marginal support for bonds and U.S. stocks (How the debt ceiling can improve market liquidity).
Chart 16: The TGA consumption phase is expected to support liquidity
Source: Bloomberg, China International Capital Corporation Research Department
However, after resolving the ceiling (Q4 2027), bond supply and liquidity may face temporary pressure, which is not conducive to term premiums and the performance of U.S. stocks. After the agreement between the two parties, the Treasury needs to reissue bonds to replenish the TGA account, resulting in a temporary increase in bond supply and withdrawing some liquidity (The debt ceiling paradox: avoiding unavoidable liquidity contraction). Looking back at 2023 and 2025: 1) In terms of bond supply, the net issuance scale of Treasury bonds in the second and third quarters reached 1.01 trillion dollars and 1.06 trillion dollars, with structural supply pressure concentrated at the short end, short-term bond issuance reaching 794 billion dollars and 613 billion dollars respectively (Chart 18). During the same period, the term premium of U.S. Treasuries spiked or remained high, maintaining pressure for about a quarter (Chart 19). 2) In terms of liquidity, within three months of lifting the debt ceiling constraint, TGA balances rose by 404 billion dollars and 447 billion dollars respectively, equivalent to 7-9% of the liquidity size in the U.S. at that time (Chart 16), marginally suppressing risky assets like U.S. stocks.
Chart 17: In September 2026, 33.4% of the tradable Treasuries will mature within a year, demonstrating stable refinancing pressure
Source: TBAC, China International Capital Corporation Research Department
Chart 18: To replenish the TGA account, debt issuance in Q3 2023 and Q3 2025 exceeded 1 trillion dollars
Source: Haver, China International Capital Corporation Research Department
Chart 19: Following the Treasury's replenishment of the TGA account, after resolving the debt ceiling in 2023 and 2025, the term premium of U.S. Treasuries spiked or remained high, with pressure lasting approximately one quarter
Source: Bloomberg, China International Capital Corporation Research Department
► Finance: Marginally reduced pressures of bond issuance, but unfavorable for traditional demand and the repair of cyclical sector profits. After the midterm elections, intensified gamesmanship between both parties may limit the scope for fiscal expansion. Additionally, the ratio of tradable U.S. Treasuries maturing within the next year remains stable (Chart 17), allowing refinancing pressure to be controllable; we believe the supply pressure of U.S. Treasuries may weaken. However, at the same time, support for growth from fiscal policy will also lessen, especially for traditional demands more sensitive to government investment and consumer purchasing power, which may constrain profit recovery in the cyclical sector.
► AI: Key developments still depend on progress in AI, but local regulation may exacerbate disruptions. Currently, the lack of clear progress in AI models and applications situates market expectations in a "transitional phase", compounded by continuously high capital expenditure squeezing cloud vendors' free cash flow, causing growing concerns over the speed of revenue realization and investment returns in AI. The AI pressure index we constructed has also been continuously worsening since the end of September (Chart 20). If local governments further tighten regulation, raising AI investment costs, it may heighten market doubts and trigger temporary disturbances.
Chart 20: The AI pressure index we constructed has deteriorated continuously since the end of September
Source: Bloomberg, FactSet, China International Capital Corporation 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 the debt ceiling was hit, TGA balances fell approximately 25% compared to three to four months prior; TGA amounts used TBAC's forecast values as of the end of 2026.
[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
Source of the article
This article is excerpted from "The Implications of the Democratic Sweep on Assets," released on November 5, 2026
Liugang, CFA Analyst SAC Certification Number: S0080512030003 SFC CE Ref: AVH867
Haoyue Ning Contact Person SAC Certification Number: S0080125070024
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