2026 Midterm Elections: What’s at Stake for Markets - Thoughts on the Market

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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.

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Transcript2 lines

[00:01]
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Welcome to Thoughts on the Market. I'm Michael Zezas, global head of fixed income research and public policy strategy. Today we're tackling a question that's top of mind after last week's off cycle elections in New Jersey, New York, Virginia and California, what could next year's midterm elections mean for investors, especially if Democrats take control of Congress? It's Friday, November 14th at 10:30am in New York. In last week's elections, Democrats outperformed expectations. In California, a new redistricting measure could flip several House seats. And in New Jersey and Virginia, Democrat candidates won with meaningfully higher margins than polls suggested was likely. As such, prediction markets now give Democrats a roughly 70% chance of winning the House next year. But before we jump to conclusions, let's pump the brakes. It might not be too early to think about the midterms as a market catalyst, but we'll be doing plenty of that. But we think it's too early to strategize around it. Why? First, a lot can change, both in terms of likely outcomes and the issues driving the electorate. While Democrats are favored today, redistricting turnout and evolving voter concerns could reshape the landscape in the months to come. Second, even if Democrats take control of the House, it may not change the trajectory of the policies that matter the most to market pricing. In our view, Republicans already achieved their main legislative goals through the tax and fiscal bill earlier this year. The other market moving policy shifts this year think tariffs and regulatory changes have come through executive action, not legislation. The administration has leaned heavily on executive powers to set trade policy, including the so called Liberation Day tariffs, and to push regulatory changes. Future potential moves investors are watching, like additional regulation or targeted stimulus would likely come the same way. Meanwhile, the plausible Republican legislative agenda, like further tax cuts, would face steep hurdles. Any majority would be slim and fiscal hawks in the party nearly blocked the last round of cuts due to concerns over spending offsets. Moderates, for their part, are unlikely to tolerate deeper cuts, especially after the contentious debate over Medicaid and the obbba. So what could change this view? If we're wrong, it's likely because the economy slows and tips into recession, making fiscal stimulus more politically appealing, consistent with historical patterns. Or Democrats could win so decisively on economic and affordability issues that the White House considers standalone stimulus measures like reducing some tariffs. How does this all connect to markets for US Equities? The current policy mix industrial incentives, tax cuts and AI driven capex have supported risk assets and driven opportunities in sectors like technology and manufacturing. But it also means that looking deeper into next year, if growth disappoints, fiscal concerns could emerge as a risk factor challenging the market. 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. Thanks for listening. If you enjoy thoughts on the market, please leave us a review and share the podcast. We'll keep you updated as the story unfolds.
[03:16]
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