Thoughts on the Market

Episode: 2026 Midterm Elections: What’s at Stake for Markets

Host: Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy
Date: November 14, 2025

Episode Overview

This episode explores the implications of the upcoming 2026 midterm elections in the United States, specifically focusing on how a potential Democratic takeover of Congress could impact financial markets. Host Michael Zezas discusses recent electoral trends, evolving legislative dynamics, and key policy catalysts that investors are watching.

Key Discussion Points & Insights

1. Recent Election Results and Democrat Momentum

• Election Recap: Democrats exceeded expectations in the recent off-cycle elections in California, New Jersey, and Virginia.
  • California: A redistricting measure might lead to flips in multiple House seats.
  • New Jersey & Virginia: Democratic candidates outperformed polling, winning by notably higher margins than predicted.
• Market Reactions: “Prediction markets now give Democrats a roughly 70% chance of winning the House next year.” (Michael Zezas, [00:41])

2. Caution Against Premature Market Positioning

• Strategic Patience: Zezas urges listeners not to overreact to current trends, noting, “It might not be too early to think about the midterms as a market catalyst... but we think it’s too early to strategize around it.” ([01:04])
• Reasons for Caution:
  • Volatility in Voter Issues & Turnout: The political landscape could shift dramatically in months ahead.
  • Policy Uncertainty: Core market-moving policies may remain unchanged regardless of which party controls the House.

3. Limited Legislative Leverage and Executive Authority

• Past Policy Shifts: Republican priorities—mainly tax and fiscal changes—have already passed earlier in the year.
• Executive Action Dominance: “The other market moving policy shifts this year—think tariffs and regulatory changes—have come through executive action, not legislation.” ([01:48])
  • Trade Policy: The administration’s use of “Liberation Day tariffs” exemplifies executive-led shifts.
  • Regulation: Regulatory priorities are likely to be pursued through executive authority rather than through Congress.
• Future Outlook: Additional meaningful legislative movement, especially from a slim Republican majority, appears unlikely. Key Republicans previously resisted further tax cuts due to budget concerns, and moderates remain opposed to deeper cuts. ([02:12])

4. Potential Catalysts for Policy Change

• Economic Downturns or Shifting Voter Priorities:
  • A recession or sharp economic slowdown could pressure both parties to adopt new fiscal stimulus—consistent with historical patterns.
  • If Democrats win big, especially on affordability messaging, the administration might contemplate standalone stimulus (e.g., reducing some tariffs). ([02:28])

5. Market Implications & Sector Impact

• Current Supportive Policies: Industrial incentives, tax cuts, and AI-driven capital expenditures have supported equities, especially in tech and manufacturing.
• Risks on the Horizon: If growth disappoints, “fiscal concerns could emerge as a risk factor challenging the market.” ([02:52])
  • The current political setup does not provide an obvious path to address elevated US deficits, leaving growth as “the burden” to resolve fiscal strain.

Notable Quotes & Memorable Moments

• On Market Caution:

  “It might not be too early to think about the midterms as a market catalyst, but we think it’s too early to strategize around it.”
  — Michael Zezas, [01:04]

• On Recent Policy Movements:

  “The other market moving policy shifts this year—think tariffs and regulatory changes—have come through executive action, not legislation.”
  — Michael Zezas, [01:48]

• On Fiscal Risks:

  “There doesn’t appear an obvious political setup to shift policies to deal with elevated US deficits, meaning the burden is on better growth to deal with this issue.”
  — Michael Zezas, [03:08]

Timestamps for Important Segments

• [00:00] Introduction and framing: What’s at stake post-2025 elections
• [00:36] Review of recent off-cycle election outcomes and implications
• [01:04] Caution about early market reactions to political shifts
• [01:28] Discussion on legislative vs. executive policy changes
• [02:12] Barriers for further legislative action by Republicans
• [02:28] Potential catalysts that might shift policy direction
• [02:52] Direct market implications: sectors, risk factors, and the fiscal outlook

Summary

Michael Zezas delivers a nuanced and measured take on how the 2026 midterm elections could drive—or fail to drive—market developments. While current momentum favors Democrats, Zezas underscores the unpredictability of both electoral outcomes and the policies that most impact investors. He argues that most impactful policy changes in the recent period have come from executive actions, not Congressional legislation—a trend likely to continue regardless of who controls the House. The biggest risk for investors, in Zezas’s view, may be fiscal concerns arising if US growth stagnates, with no clear political plan to tackle deficits. The key message: Stay watchful, but don’t jump the gun—policy and economic landscapes are in flux.

For listeners and investors alike, this episode offers timely, data-driven perspective on the fraught intersection between US politics and market performance.