US midterms 2026: A new balance of power

US voters have changed the balance of power in Washington. Republicans have lost their majority in both chambers, with a victory in the Senate and the House.

The result gives Democrats control of Congress, which is poised to significantly constrain the administration’s legislative agenda for the remainder of its term.

Initial market moves as of 7am CET were as follows: the S&P 500 -0.5%, the US 10-year Treasury yield 4.94%, and the US dollar 0.82 CHF.

Our immediate interpretation

The result is likely to reduce the administration’s ability to advance its domestic agenda through Congress. Further fiscal expansion now appears less likely, while spending, taxation, and major regulatory initiatives could face greater scrutiny. Democratic control of both chambers also raises the prospect of stronger congressional oversight and renewed debate over tax policy.

That does not mean political uncertainty disappears. With fewer options in Congress, the White House may rely more heavily on executive powers, particularly on tariffs, sanctions, immigration, and foreign policy. In our view, a tougher US response to Iran after the midterms is a material risk that could push oil prices and inflation higher.

For investors, the composition of Congress matters, but we believe the next market move will still be shaped by growth, inflation and interest rates.

What it means for markets

Equities: A Democratic sweep removes an immediate source of political uncertainty but also places a stronger check on the administration’s domestic agenda. Less scope for fiscal expansion could temper growth, while renewed debate over corporate and high-income taxation may affect sectors differently. Historically, US equities have performed well after midterm elections, in part because investors gain greater visibility on the policy backdrop. However, elevated equity valuations and high bond yields could leave less room for a post-election lift, making earnings growth particularly important.

Fixed income: Divided government can support Treasuries by limiting further fiscal expansion. But blocking new spending is not the same as reducing the existing deficit. Persistent deficits and heavy Treasury issuance could therefore limit how far long-term yields fall, even with a stronger congressional check on the administration. Inflation and US Federal Reserve (Fed) policy are likely to matter more for bonds than the election result, while any renewed rise in energy prices could complicate the outlook.

US dollar and broader markets: For the US dollar, the immediate reaction may reflect relief and investor positioning more than a lasting change in direction. Over time, relative growth and Fed policy are likely to remain more important. With Congress constraining the domestic agenda, greater use of executive powers around tariffs and sanctions could also have differing effects across sectors, currencies and regions.

What we will be looking for

The first test is likely to be whether the result leads to orderly negotiation or recurring confrontation over spending and the debt ceiling. We will also watch whether the prospect of less fiscal expansion affects Treasury yields. However, the initial market reaction may be difficult to interpret, given the Treasury’s quarterly refunding statement later today and the potential impact of Friday’s payrolls report on bond markets this week. Beyond that, we will watch whether the administration turns more toward tariffs, sanctions or other executive measures, and how earnings respond to growth and financial conditions.

The election provides a clearer map of Washington. It does not, by itself, settle the outlook for markets.