Key Points
Washington is heading into divided government. Democratic control of Congress will make major legislation harder to pass, while giving the opposition more influence over spending, appointments and oversight.
Policy uncertainty remains. Tariffs, geopolitical developments and growing scrutiny of AI infrastructure costs can still affect earnings and inflation, even with Congress at a standstill.
Our investment approach remains unchanged. We continue to emphasize diversification, durable earnings and income, while watching interest rates, credit conditions and whether AI spending translates into profitable growth.
Perspective
The midterm elections delivered a significant change in Washington, with Democrats winning control of both the House and Senate. Beginning in January, President Trump will face an opposition from Congress for the remaining two years of his term. That makes it harder to pass major legislation and gives Democrats greater influence over spending, appointments and oversight. For investors, the question is how those changes affect corporate earnings, borrowing costs and the outlook for growth.
Our view is that the election changes the policy backdrop without, by itself, changing the investment outlook. Divided government can limit sweeping legislation, which markets often welcome. But it also creates more difficult negotiations and gives the administration greater incentive to pursue its priorities through executive action. We expect fewer large legislative initiatives and continued uncertainty around trade, regulation and foreign policy.
The Senate result is particularly important. A Democratic House can block legislation and launch investigations. A Democratic Senate can also slow or block appointments to financial regulators, the courts and other agencies. That could make the next phase of deregulation more difficult. It does not automatically undo existing rules or remove officials already in place, but it changes what the administration can accomplish from here.
Democrats will face constraints of their own. Most legislation still requires bipartisan support in the Senate, and the president retains his veto. Broad changes to the tax code will therefore be difficult. We would be cautious about making major financial decisions based on campaign proposals alone. There is a considerable distance between a political priority and a law that changes a family’s tax bill.
The first test comes before the new Congress takes office. Government funding expires December 11th, leaving lawmakers a short window to negotiate spending alongside defense legislation and other unfinished business. A longer funding agreement would provide some certainty. A temporary extension would move the negotiations into next year, when Democrats have more leverage. The debt limit also deserves attention, particularly if it remains unresolved heading into 2027.
For markets, the fiscal backdrop matters beyond any individual deadline. Divided government may restrain new spending, but it does little to address the existing deficit or the government’s borrowing needs. We would not assume that congressional gridlock automatically brings lower Treasury yields. Inflation, Federal Reserve policy and the amount of debt investors must absorb will remain central to that outlook.
Trade policy is another area where the election changes less than some might expect. The administration retains substantial authority to impose tariffs and negotiate with trading partners. Congress can apply pressure, particularly where tariffs raise household or business costs, but it cannot easily take control of those decisions. We expect negotiations to continue, with the possibility of selective relief alongside renewed threats. For companies, the consequences will depend on their supply chains, pricing power and ability to manage higher costs.
Within equities, we are paying close attention to artificial intelligence (“AI”) and the infrastructure supporting it. Our view remains that AI investment is an important source of economic growth. The election does, however, reinforce a practical challenge: building data centers requires electricity, water, permits and community support. Rising utility bills have made the question of who pays for that expansion increasingly political. That does not necessarily weaken demand for AI. It can raise the cost of meeting demand and delay when projects begin generating revenue. We are watching whether developers have secured power, committed customers and sufficient financing, and whether they will need to absorb more of the expense of expanding the grid. Those details matter when evaluating which companies can turn substantial investment into durable earnings. Strong demand alone does not guarantee an attractive return for shareholders.
Other sectors face a mixed picture. Financial companies could encounter more scrutiny of lending practices, private credit and consumer fees, while a less predictable confirmation process could slow regulatory changes. In healthcare, greater protection for government-supported coverage could help some providers, while drug pricing and pharmacy-benefit managers remain potential targets for bipartisan action. These are reasons to examine individual businesses carefully. A change in congressional control rarely affects every company within an industry equally.
Geopolitics may prove more immediate than any legislative development. Iran remains a key risk because renewed escalation could affect oil prices, shipping and inflation quickly. Higher energy costs would pressure household budgets and business margins while complicating the Fed’s decisions. We are watching those developments alongside Washington’s spending negotiations.
For client portfolios, the election alone is not a reason to make broad allocation changes. Our approach remains grounded in diversification, the durability of earnings and the price we pay for those earnings. We continue to see value in looking beyond the companies receiving the most attention from the AI boom, including quality businesses whose longer-term prospects may be overlooked. Within fixed income, we remain focused on earning income while managing exposure to interest-rate risk.
History provides some encouragement: stocks have often performed well in the year following midterm elections. We regard that as context, rather than a forecast. Growth, inflation, interest rates and corporate profits will ultimately carry more weight than the political calendar. We will adjust portfolios when policy changes alter those fundamentals or create attractive opportunities. For now, our focus is on whether earnings remain resilient, whether credit conditions stay orderly and whether the spending behind AI continues to translate into profitable growth. Those are the developments most likely to shape returns after the election headlines fade.
