Democrats won control of both chambers of Congress yesterday, with majorities meaningfully larger than polls and markets had anticipated. The wider margins strengthen their hand with the White House. We expect upcoming funding and debt-limit deadlines to become the main pressure points, with the Iran conflict, tariffs, and last year’s spending cuts at the top of the agenda. Federal AI policy is unlikely to change much, since any new rules would still require Republican votes. The states are a different story. New Democratic governors in several key markets ran on tougher data center rules, and temporary pauses on new projects are possible in some states. Early market moves suggest equities will be positive today, with bonds roughly steady, building on what has been a strong year for SCS portfolios. Markets have historically done well in the year following a midterm, and we continue to see the health of the economy as the primary driver of returns into 2027. We are not making strategic changes.
What Happened
Strong turnout and the President’s low approval ratings worked against Republicans. In the Senate, Democrats held onto seats in Georgia, Michigan, Minnesota, and New Hampshire and picked up seven Republican seats: Iowa, Kansas, Maine, North Carolina, Ohio, South Carolina, and Texas. That puts them at a minimum of 54 seats. Two races remain open. Prediction markets favor Democrats in Alaska, while Mississippi could take several more days to resolve, and winning both would bring Democrats to 56. The House result was even more lopsided. Democrats won in deep-red territory, including districts in Kentucky, Texas, and Florida that Trump carried by 10 to 15 points two years ago, and they appear to have won the national House vote by low double digits. California is still counting, so the final tally will take time, but estimates suggest a majority of over 250 seats. Neither chamber, however, reaches the two-thirds threshold needed to override a veto.
What This Means for Policy
A Democratic House was widely expected, so the Senate win changes the policy picture less than the headlines suggest. The real leverage comes from the calendar. Congress must keep the government funded and raise the debt ceiling before next fall, and Democrats are likely to attach conditions to both. Early signals point to the Iran conflict, tariffs, last year’s spending cuts, and health care benefits as their main asks. On Iran, the new Congress could move to restrict funding or challenge a deployment that has run well past 90 days without Congressional authorization. Market pricing suggests investors already see a negotiated resolution as increasingly likely. Democrats will also regain subpoena power, which opens the door to oversight investigations next year.
Fiscal Spending
We expect a Democratic Congress to lean toward more spending rather than less, at least in the near term. Reversing the cuts in last year’s fiscal package is likely to be an early priority, and estimates suggest this alone would add roughly 0.25% of GDP to federal spending in 2027.1 Any agreement on discretionary spending or health insurance subsidies could push that figure somewhat higher. The first pressure point is December 11, when current government funding runs out. A short-term stopgap into the first quarter appears likely, though Democrats may try to win concessions even before they are sworn in on January 3. Over a longer horizon, the bigger issue is the deficit, which has widened from $1.38 trillion in FY22 to nearly $2 trillion in FY26. Restoring spending and reining in deficits pull in opposite directions, so we would expect only modest progress in the near term. Control of the purse strings gives Democrats some ability to push back, potentially at the cost of a shutdown. More meaningful changes, such as tax increases or unwinding OBBBA, would likely have to wait for a change in the White House.
AI & Data Centers
Data centers were the issue markets focused on most overnight. Washington is unlikely to drive change here, since federal AI legislation would still need Republican support in the Senate and the President’s signature. The shift is happening at the state level. Democrats won governorships in Texas, Georgia, Michigan, Nevada, and Ohio, took full control of state government in Pennsylvania and look likely to do the same in Arizona. Outside of Ohio, tighter data center oversight was part of the Democratic platform in each of these states. Analysts expect the incoming governors of Texas, Georgia and Michigan to pause new projects while legislatures write new rules.2 New rules could tighten incentives and resource standards and give local governments more say over siting. Together these states represent over 40% of the planned US data center pipeline, and Texas alone accounts for about a quarter. Texas Governor-elect Hinojosa has called for an immediate moratorium. The market is weighing two outcomes. In the first, projects already underway proceed and new development moves to other states. In the second, this becomes one more factor slowing AI infrastructure spending. We lean toward the first, a view shared by several Wall Street trading desks this morning. Developers have alternatives, regulation is more likely than an outright stop, and data centers were not a top issue for voters, which suggests any pauses will be temporary.
Market Reaction Today & SCS Portfolios
Markets opened firmly risk-on. A clear outcome, together with the President’s acceptance of it, removed a key source of uncertainty. At the time of publishing (just after 11am), US equity markets were up roughly 1-2%, Treasury yields were flat, with the 10-year near 4.9%, and the dollar softened. Taken together, early moves point to positive returns today for the equity side of SCS portfolios, with fixed income roughly steady.
Longer-Term Outlook
History has been kind to markets after midterms. Since 1950, the S&P 500 has risen in the 12 months following every midterm election, gaining roughly 15% on average.3 Investors have generally welcomed divided government and the legislative gridlock that tends to come with it. We continue to believe the strength of corporate and household balance sheets will matter more for returns into 2027 than the outcome in Washington.
1,2 Estimates represent Goldman Sachs Investment Research forecasts and are subject to change. 3 J.P. Morgan Market Intelligence and Bloomberg. Past performance is not indicative of future results.
Sources: Goldman Sachs Global Investment Research, “USA: Democrats Win a House and Senate Majority with Gains Well Above Expectations,” November 4, 2026; J.P. Morgan Market Intelligence, “Morning Briefing: Midterms Inducing a Global Risk-On Rally,” November 4, 2026.
