In what some are calling a “blunami,” a “bluelash,” and “a red wipeout,” Democrats have won both the House and the Senate in a historically decisive victory.
Two specific indicators had been pointing to a blue wave: 1) the Generic Congressional Ballot, where Democrats were preferred over Republicans by +9 points on average nationwide, and 2) the enthusiasm gap, in which Democrats were more enthusiastic than Republicans about voting by +10 points. Both of those metrics – which have been two statistically significant indicators in other waves (and were not present in 2022) – suggested a 2006-style blue wave, when Democrats took control of both chambers, winning the House by 31 and the Senate by 6 seats.
However, yesterday’s election looks more like 1974 than 2006. Democrats ended up winning by 13 points nationwide, much like in 1974, when voters, tired of Watergate and presidential overreach and angry about inflation and Vietnam, ushered in one of the largest Democratic freshman classes in the House and the Senate as a rejection of Nixon-style politics. This was followed by several years of legislative efforts toward passing “good government” reforms and trying to constrain the executive branch – something we could see in 2027.
The two G’s and two H’s
The two G’s and the two H’s – gas, groceries, housing, and healthcare – are top of mind issues for voters in 2026, as they have been since COVID. Exit polls indicate affordability had a lot to do with last night’s outcome, but there were other issues, including concerns over presidential overreach – particularly as they relate to immigration, as well as concerns over presidential overreach – particularly as they relate to immigration (in Texas, 65% of voters said Trump had gone too far with immigration).
This was also coupled with a rejection of the general incivility in our politics as well as a response to the Supreme Court’s decision on Section 2 of the Voting Rights Act.
We also note that voters in the U.S. date politicians (and political parties), they do not marry them. Last night was a testament to this. Many of the gains that Trump was able to make in 2024 – with Hispanic voters, young men, and broadly Independents, in particular – were erased last night. Importantly, in our days of thermostatic politics, these folks can swing back, something Democrats would be wise to keep in mind.
Expect a more moderate Democratic majority in both chambers
Something that may be lost in the immediate aftermath, but is pertinent for markets in particular, is that Democrats won by winning in deep Republican states (South Carolina is a Trump +18 state) and House districts. Expect these “majority makers” to avoid cultural lightning rod issues and lean into affordability and oversight; and for deficit hawks, we should expect a renewed “Blue Dog” coalition – the group of moderate Democrats focused on fiscal responsibility.
Additionally, it appears that moderate Democrats did substantially better than progressive candidates in swing states that will be key to 2028. This was the case in Ohio, where the Democratic gubernatorial candidate (Amy Acton) outpaced the more progressive Senate candidate (Sherrod Brown) by 3 points, as well as in Michigan, with Jocelyn Benson outperforming Abdul El-Sayed by 4 points.
Candidate quality really matters
Another lesson from last night, in which Democrats overcame what looked like a nearly impossible Senate map – having to win in deep double-digit Trump territory in order to have a shot at taking back the Senate – is the importance of candidate quality. Many of the candidates recruited by Democrats for the Senate, including Annie Andrews, Roy Cooper, and James Talarico, were not running on the national Democratic platform, but very local ones.
Also, in addition to some strong Democratic candidates, there are Republicans who are wondering how those results would have looked if President Trump had not put his finger on the scale with many of the candidates (e.g., Ken Paxton in Texas, Darline Graham in South Carolina, as well as candidates in North Carolina and Georgia).
In true wave elections, some weird things happen, and last night was no exception. Indeed, Democrats are winning in places they did not know were competitive – in Nevada’s House District 2, for instance, Democrats won for the first time ever (the district was created 40 years ago). In Kansas, of course, a state that has not elected a Democratic senator since 1932, Adam Hamilton easily beat incumbent Republican Senator Roger Marshall.
Where do we stand as of now?
The House: Recall that Democrats needed to win +3 seats to get to the 218 votes to win a simple majority. While many House races have not yet been called as of this writing on Wednesday, it looks like Democrats are on track to win the House by +40 to +45 seats, bringing them to nearly 260 seats. Depending on how the remaining seats are called, this could be the largest Democratic House majority since 2008.
The Senate: Democrats needed to hold onto their current seats and win +4 seats in the Senate, and as of this writing, Democrats have won +7 Senate seats, including South Carolina, North Carolina, Texas, Kansas, Maine, Ohio, and Iowa. But they are also leading in both Mississippi and Alaska, which, if they win, would bring the Democratic majority to 56-44, the biggest majority since 2008.
The governors’ races: The Democratic sweep extended to the gubernatorial races, and while some have not yet been called, it appears that Democrats will take a majority of the governors’ mansions (trending at 28 of the 50 as of this writing). Importantly, this is where the risk lies to the AI trade, not from the federal government.
What about data centers?
The biggest risk to the AI infrastructure buildout is at the state level, and while votes are still being counted, it appears that all of the 45+ data center ballot initiatives that restrict data centers – from Ohio to Nevada to Kansas – have passed, and by large majorities in most cases.
Importantly, many of the newly elected Democratic governors ran on platforms of a statewide moratorium, including in many of the areas with the largest potential buildout that could be the most vulnerable to a pause, including Texas, Georgia, Ohio, and Iowa. What is more is several state legislatures flipped to pure Democratic control, including Arizona, Michigan, Wisconsin, Minnesota, and Nevada – some of which are also likely to take up the issue of codifying data center restrictions.
The conventional wisdom seems to be that the data center rhetoric is merely election-year rhetoric, but we would disagree. We think because the politics around data centers are just so bad – people have a more favorable view of nuclear reactors than they do data centers – and importantly a deep distrust of big tech, this issue has staying power politically. And as with many things, politics often leads policy. We think these new governors will be hard-pressed to not follow through and impose at least some restrictions on data centers, if not outright moratoriums. At the very least, we would expect more restrictions at both the state and local levels and a higher cost of doing business for hyperscalers in particular. A slower buildout could put downward pressure on growth, inflation, and rates.
What does the Democratic sweep mean for national policy?
Remember, even with a blockbuster night, there are still constraints on Democrats in terms of what they can get done. President Trump is still in the White House with veto authority; it takes two-thirds of both chambers to overturn a veto; and Democrats, even with 56 votes in the Senate, would still need at least 4 Republicans to work with to overcome a filibuster in the first place (the filibuster is not going anywhere).
Issues of possible compromise: While there will be a lot of investigations (e.g., tech, Wall Street, defense contractors, and health insurance), there are some areas of possible compromise between Democrats and President Trump, who of course was formerly a Democrat. Those include drug pricing and housing, as well as some black swans such as Social Security reform and immigration. We could possibly see something on AI safety, but we would put lower odds on that. Again, the data center issue is likely to be more at the state level.
Spending: We continue to believe the deficit is a loser from elections in Washington – regardless of how those elections may turn out. Democrats will want to spend more on healthcare – many ran on restoring the Obamacare subsidies and reversing the Medicaid cuts – while Trump will want to (need to) spend more on the Pentagon. We think there is a scenario where the upcoming 2027 debt ceiling is not a volatility event at all as Democrats and Trump are able to find common ground on more spending. Of course, there is another scenario where each overplays their hand, and we see significant volatility into the debt ceiling’s so-called X date, which is mid to late 2027. Regardless, we think deficits will stay elevated above 6%.
Veto-proof issues: There are several issues that could pass both the House and the Senate by a veto-proof majority – 290 in the House and 67 in the Senate – which could include a rescission of Canadian tariffs, a rebuke of the Iran war (this would have to be done through some funding constraint of the Pentagon), and a mandatory imposition of Russian sanctions (that prevents Trump from having any sort of “waiver” authority).
Reconciliation: Recall, there is a Senate procedural process that allows for certain legislation to pass with only 50 votes in the Senate, not the typical 60. We could see Democrats use this to repeal tax credits for tech, for instance, or to increase the debt ceiling, thereby daring Trump to veto it. It is too early to say exactly how this will play out, but I would expect Democrats to lean into this procedural tool.
No or very few confirmations: The biggest difference between a split Congress and a Democratic sweep is the ability for a Democratic Senate to block all judicial and federal nominees; this includes Fed governors, meaning any concern about Fed independence should be finally put to rest. This also means we could see several departures in the lame duck; remember that Defense Secretary Donald Rumsfeld resigned the day after the 2006 elections.
Peak Trump: We said at the beginning of this year that 2025 was likely “peak Trump” as the first year often is for other presidents who enjoy a congressional majority. We think 2027 and 2028 will see Trump’s power much more diminished (as was the case for Biden after the midterms), although it is important to keep in mind that Trump still enjoys broad authorities around foreign policy (Iran escalation still seems a possibility), as well as export controls, sanctions, immigration enforcement, and tariffs, an area we could still see him lean into despite pushback from Congress.
What about 2028?
It is way too early to talk about 2028, but certainly, the large majorities in both chambers will make it more difficult for Republicans to win back Congress, particularly the Senate. But one lesson from 2024 to 2026 is that many voters – almost a simple majority of voters identify as Independents – are renting, not owning, their politicians and their parties. While there are certainly large cushions to insulate Democrats in both chambers, there is of course a risk that Democrats overinterpret these results as an endorsement, rather than what they seem to be more of – a protest.
With that said, we do think last night means that we will see not only a (crowded) open primary for Democrats, but likely one for Republicans as well, as Vice President JD Vance is likely to have to compete for the Republican nomination, rather than be coronated.
Bottom line
Last night will go down in history as one of the largest midterm waves – similar to 1974 and 2006 for Democrats and 2010 for Republicans – but what we have also seen in our thermostatic politics is that things can change in the next election, so it is wise not to draw too many conclusions from last night, although the odds that Democrats hold Congress in 2028 have gone up because of their large cushion.
The immediate market reaction to the election has generally been favorable, with both equity markets and bond markets rallying. For the bond market in particular, an independent Federal Reserve, political focus on affordability, and potentially slower technology investment and AI capital expenditure could shift recent headwinds into tailwinds.
There will be a lot more to chew on over the next few weeks and months, but here are some open questions for both parties: For Republicans, how do they try to recreate the Trump coalition of 2024, including with young people and Hispanics? And for Democrats, do they learn the lesson from this election that at its core, the U.S. is a centrist country with moderates outperforming progressives, or do they pivot too far left, and fail to build on their gains from last night?
