Written by: Bu Shuqing, Wall Street See
The Democratic Party achieved a landslide victory in the U.S. midterm elections, not only regaining control of both the House and Senate but also making breakthroughs in several traditional Republican strongholds. The U.S. political landscape has undergone major changes, and the Trump administration's policy agenda for the next two years will also face more constraints.
According to Xinhua News Agency citing U.S. media predictions on the 3rd, the Democratic Party will not only win control of the House of Representatives in the midterm elections but has also successively defeated Republicans in multiple key states to gain Senate seats.
After the prospect of a Democratic sweep of Congress became clear, U.S. stock futures once plunged sharply, but as investors gradually digested the election results, market sentiment quickly recovered, major stock index futures recouped their losses, Nasdaq 100 index futures turned from decline to gain, and Dow futures rose more than 1%. At the same time, U.S. Treasuries strengthened across the board, the dollar weakened, and gold returned above $4,000.
The Saxo Bank research team believes that this election will push the U.S. market into a new policy environment. The bank has sorted out 12 questions that investors are most concerned about, including fiscal policy, AI investment returns, the dollar trend, and global asset allocation.
1. What does a Democratic sweep of Congress mean for the U.S. economy and financial markets?
The most important change is that Washington's policy environment may shift from a relatively unified policy agenda to political gridlock.
Trump remains the U.S. president, but Democratic control of both chambers of Congress will significantly limit his legislative agenda, especially on taxes, fiscal stimulus, and government spending. However, Democrats cannot arbitrarily rewrite policy either, because Trump still holds the presidential veto power.
Therefore, what is more likely in the next two years is intensified political confrontation, increased congressional oversight, and legislative deadlock, rather than the immediate and comprehensive overturning of existing policies.
For the market, this means reduced certainty about future fiscal stimulus and potentially increased uncertainty about regulatory policy.
Today's market performance already reflects some of this concern.
U.S. stock futures once fell sharply, reflecting investors' concerns about tighter regulation of the U.S. tech industry and changes in fiscal policy. At the same time, U.S. Treasuries rose and the dollar weakened, indicating that the market is also reassessing the future path of U.S. fiscal expansion and economic growth.
2. Does this mean Trump's economic agenda is over?
More accurately, it is constrained, not completely dismantled.
The U.S. Congress and the White House hold different policy tools, and Democratic control of Congress cannot directly end all policies of the Trump administration.
Specifically:
- Taxes and fiscal stimulus: New tax cuts and large-scale spending plans will be harder to pass, but existing tax legislation will not automatically expire.
- AI and the tech industry: Congress can strengthen regulatory scrutiny and restrict new incentive measures, but comprehensive regulatory legislation may still face a presidential veto.
- Trade and tariffs: Trump still has considerable executive power, although these powers are also subject to legal constraints. Democratic control of Congress does not mean tariff risks disappear.
- Energy and geopolitics: The White House still has significant influence in foreign policy, sanctions, and military decisions.
- Personnel appointments: If Democrats control the Senate, Trump's nominated judges and senior officials may be harder to confirm.
What is truly worth watching is that political confrontation may further evolve into market volatility caused by government spending disputes, government shutdown threats, and debt ceiling issues.
Saxo Bank believes that the market may be too quick to equate Democratic control of Congress with weaker U.S. economic growth. Most of the existing policy framework remains in place, and the private sector's investment cycle continues.
3. Will a Democratic sweep of Congress bring lower inflation and interest rates?
Narrower room for fiscal stimulus may reduce some of the upward pressure on U.S. Treasury yields, but the inflation outlook is not that simple.
If the likelihood of new deficit-financed stimulus in the future declines, the market's expectations for U.S. Treasury issuance scale and long-term financing needs may also decrease accordingly. This helps explain why U.S. Treasury yields fell as the election results gradually became clear.
Today, U.S. Treasuries strengthened across the board, with the 10-year Treasury yield once falling by about 5 to 6 basis points during Asian trading hours, reflecting the market's expectation of weaker future fiscal expansion.
But weaker fiscal stimulus does not necessarily mean inflation will fall. Tariffs, energy prices, wages, and supply constraints may still continue to push up prices.
For the Federal Reserve, the election results will not change its policy objectives. If economic growth slows but inflation remains high, monetary policy decisions may actually become more complicated.
The investment implication is that U.S. Treasuries may benefit from weaker economic growth expectations, but a sustained rally still requires support from economic data and inflation trends, rather than merely short-term sentiment changes brought by the election.
4. Why are tech stocks and AI stocks particularly hard hit?
This election is accelerating a reassessment of AI investment logic that had already begun.
Before the midterm elections, the tech industry was already facing issues such as elevated valuations, massive capital expenditure scales, and how quickly AI investments can actually translate into profits. Democratic control of Congress adds a new variable to these concerns: regulatory scrutiny.
There are mainly three risks:
- Increased regulatory scrutiny: Congress may launch more investigations into AI companies, involving areas such as market competition, consumer protection, data privacy, and model safety.
- More restrictions on data centers: Power consumption, grid costs, water use, and project approvals for data centers may face stricter scrutiny. Opposition from local communities may also push up costs and delay project progress.
- Capital expenditure faces stricter scrutiny: A tighter regulatory environment may lead investors to demand more from AI infrastructure's financing capacity and profit prospects.
In addition, congressional scrutiny may also promote the development of AI safety standards, independent model evaluations, and accountability mechanisms for data center developers.
Today's performance of Asian tech stocks already reflects this concern. South Korea's stock market once fell about 4%, and Japan's stock market was also hit by the cooling of AI trades. Investors worry that if Democrats push for stricter AI regulation, data center construction and related infrastructure investment may be affected.
However, this does not mean the United States will fully turn to anti-AI policies; both parties still have considerable common interests in maintaining U.S. AI leadership.
Saxo Bank believes that this political change provides a catalyst for a revaluation of the AI industry, but the deeper issue is that investors are increasingly unwilling to reward companies simply for increasing AI spending; they are beginning to demand a clear path to return on investment.
5. Does this mean the AI boom cycle is about to end?
Not exactly, but the AI industry may be shifting from an investment expansion cycle to a profitability cycle.
Previously, companies could be rewarded by the market as long as they continued to expand AI computing power and infrastructure scale. Now, investors are beginning to ask stricter questions: Who pays for this expansion? How much debt is involved? How long will it take for new capacity to translate into revenue? And ultimately, who can capture the economic benefits in the AI value chain?
Saxo Bank divides AI investment targets into three categories:
Category 1: Mature industry leaders.
These include profitable platform companies, core chip suppliers, and memory manufacturers. These companies have relatively solid balance sheets and clearer demand, so they have stronger risk resistance, but they cannot completely avoid valuation contraction either.
Category 2: Capital-intensive infrastructure companies.
These include data center developers and highly leveraged computing power suppliers. Such companies face greater financing, power supply, and regulatory risks, and their business models are more dependent on continuously increasing capital expenditure.
Category 3: AI application companies.
These companies use AI to improve production efficiency, profit margins, and customer experience without having to bear the huge investment of building the entire AI infrastructure alone.
Saxo Bank believes that the next stage of AI investment may favor Category 3 companies more, while maintaining selective allocation to Category 1 companies.
This also means that some better AI investment opportunities in the future may appear outside traditional semiconductor and hyperscale cloud computing companies.
6. Is now an opportunity to bottom-fish U.S. tech stocks?
Saxo Bank believes that selective positioning is possible, but it is not advisable to buy the entire tech sector simply because stock prices have fallen.
From a technical perspective, the 14-day Relative Strength Index (RSI) of Nasdaq 100 index futures has approached 30, entering oversold territory. This may create conditions for a short-term rebound, especially when market positioning is overly concentrated and investor sentiment has clearly weakened. On the other hand, however, Nasdaq futures have already fallen below the 200-day moving average, meaning that technical selling and new short positions may continue to prolong market volatility.
Today, U.S. stock futures fell sharply in the morning and then recovered their losses, which also reflects the rapid changes in bullish and bearish forces in the market. However, a short-term rebound does not mean that the AI investment logic has been repaired.
The key is to distinguish between a technical rebound and a fundamental re-rating.
For long-term investors, Saxo Bank prefers AI leaders with profitability, solid balance sheets, mature customer bases, and the ability to continuously generate cash flow. By contrast, greater caution is needed for highly leveraged infrastructure companies whose business models depend on continued growth in capital expenditure and smooth financing channels.
Investors should also not assume that falling U.S. Treasury yields will necessarily rescue all growth stocks. Lower discount rates are certainly beneficial for valuations, but if corporate earnings expectations deteriorate at the same time, this support may be offset.
Saxo Bank's advice is: buy quality assets in stages and selectively, rather than trying to precisely bottom-fish. Including Nvidia's upcoming earnings report, corporate earnings performance will test the AI investment logic more than the election results themselves.
According to a previous Wall Street See article, Morgan Stanley Chief U.S. Equity Strategist Mike Wilson offered a similar judgment.
In a client report released on Monday, Wilson said that regardless of the outcome, the U.S. midterm elections may become a classic "Clearing Event." As the election concludes, market uncertainty is expected to dissipate significantly, and high-quality cyclical stocks may present buying opportunities.
Historical data also supports this judgment. Wilson cited data showing that since 1982, large-cap stocks have risen by an average of about 15% (market-cap weighted) to 16% (equal-weighted) in the six months after midterm elections, with gains further expanding to about 22% over the following year.
7. After Democrats sweep Congress, how will U.S. stocks, U.S. Treasuries, exchange rates, and commodities perform?
Saxo Bank believes that after Democrats sweep Congress, the market may face a period of rising policy uncertainty and divergent asset performance.
Fiscal stimulus space is constrained, and combined with concerns over AI regulation and massive capital expenditure, U.S. stocks, especially technology stocks, may remain under short-term pressure, with volatility also increasing. However, some technology stocks have already shown signs of being oversold, and if corporate earnings remain strong, the market may also see a rebound.
By contrast, U.S. Treasuries and gold may continue to attract capital: cooling expectations for fiscal stimulus may push U.S. Treasury yields further lower; the dollar may weaken as its interest rate advantage diminishes, providing support for gold. The euro, yen, and some emerging market currencies may also benefit from a weaker dollar, but their respective economic fundamentals remain important influencing factors. The oil price trend is more complex; growth concerns may suppress oil prices, but if the Iran situation escalates again, oil prices could still rise rapidly.
Today's market performance echoes this judgment in many ways. U.S. Treasuries strengthened, the dollar weakened, and gold reclaimed $4,000, reflecting that investors are adjusting their expectations for U.S. fiscal policy and the interest rate outlook.
However, U.S. stock futures turning from sharp declines to a rebound also shows that the market has not become fully bearish on U.S. assets because of the Democratic victory. Next, whether corporate earnings can offset the pressure brought by policy uncertainty remains the key to determining the direction of U.S. stocks.
8. Is the dollar entering a more sustained decline?
There is some logic to a weaker dollar, but it is still too early to declare the end of U.S. economic exceptionalism.
In the short term, the logic is relatively clear: lower expectations for fiscal stimulus may push down U.S. Treasury yields, thereby weakening the dollar's interest rate advantage.
At the same time, the leadership position of the U.S. technology industry faces more uncertainty, which may also prompt international investors to re-diversify their portfolios and reduce concentrated allocations to U.S. assets.
Today the dollar index weakened, with the dollar once touching a one-month low, while currencies such as the euro and yen gained support. Gold also benefited from the weaker dollar, further breaking through the $4,000 mark.
But the dollar's ultimate direction still depends on growth and interest rate differentials between the United States and other economies. If the U.S. economy continues to outperform other major economies, or if geopolitical tensions escalate further, demand for the dollar may still recover.
Saxo Bank's advice is that investors can consider reducing overly concentrated dollar exposure, but should not rashly bet on a one-sided, sharp decline in the dollar.
9. Is there still room for U.S. Treasuries to rise? Are duration assets attractive again?
This election reinforced the tactical investment logic for U.S. Treasuries.
Democratic control of Congress may limit further fiscal stimulus, so investors have begun to reassess U.S. economic growth, government financing needs, and the interest rate path.
This may support the bond market through two channels:
First, lower economic growth expectations; second, the fiscal expansion premium previously reflected in Treasury yields may decline somewhat.
Today U.S. Treasuries strengthened across the board, and market expectations that future fiscal spending and tax cut plans will be blocked became one of the important reasons for the support in bonds.
But political gridlock does not mean that the U.S. debt problem has been solved. Regardless of which party controls Congress, the United States still faces enormous interest expenses and structural fiscal pressure.
In terms of allocation, Saxo Bank prefers high-quality bonds with intermediate duration, rather than aggressively betting on bonds at the longest end of the yield curve.
The middle segment of the U.S. Treasury yield curve may offer a more attractive combination of income and price appreciation, especially if economic growth slows.
The main risk is that if inflation picks up again or term premiums rise, long-term Treasury yields may still move higher even if economic growth weakens.
10. Will gold be the winner of the U.S. midterm elections?
The supporting factors for gold are relatively favorable: falling U.S. Treasury yields, a weaker dollar, and a renewed rise in political uncertainty.
Today gold prices reclaimed the $4,000 mark. Reuters reported that spot gold once rose 2.4% to $4,021.68 per ounce. A weaker dollar and falling U.S. Treasury yields provided direct support for gold prices.
Moreover, gold's investment appeal is not limited to this election. Geopolitical tensions, concerns about fiscal sustainability, and investors' desire to diversify overly concentrated equity portfolios all continue to support the long-term allocation logic for gold.
However, investors need to distinguish between gold as a portfolio diversification tool and gold as a short-term election trading vehicle.
If U.S. Treasury yields rebound or the dollar strengthens again, gold may still see a pullback. The geopolitical situation is also an important risk, especially if the conflict between the United States and Iran escalates further, the gold market may be affected by new shocks.
Saxo Bank believes that gold remains suitable as a strategic asset for hedging inflation, geopolitical shocks, and policy uncertainty, rather than a tool for chasing short-term election moves.
11. Should investors now shift from U.S. assets to international markets?
This election further strengthened the case for diversification, but it does not mean investors should abandon U.S. stocks.
U.S. companies still have clear advantages in technology leadership, profitability, innovation, and access to capital. Political gridlock will not directly eliminate these advantages.
However, the U.S. stock market had previously been highly concentrated in large technology stocks, and investors may increasingly doubt whether these companies can continue to generate excess returns at current high valuation levels.
Saxo Bank believes there are three directions worth watching:
Asian markets: selectively focus on Chinese technology companies and companies benefiting from the domestic adoption of AI applications.
Broaden the investment scope within U.S. stocks: focus on equal-weighted index allocations, quality companies outside large technology stocks, the healthcare sector, and companies able to use AI to improve profit margins.
Multi-asset diversification: use intermediate-duration bonds and gold as supplementary assets rather than relying entirely on the stock market for portfolio returns.
Today's performance in Asian markets also shows that global asset rotation is not simply capital flowing from the United States to other markets. South Korea's stock market once fell about 4% and then turned from decline to gain; the impact on different markets varies, and markets with a higher proportion of technology stocks are especially vulnerable to changes in AI regulatory expectations.
It should be noted that a correction in U.S. technology stocks does not mean all international stock markets will rise. If broad risk aversion emerges in the market, global equity assets may all come under pressure.
12. What factors could reverse the current negative market reaction? And what should be watched before the end of the year?
Saxo Bank believes there are three major factors that could drive a reversal in market sentiment.
First, AI companies' profitability performance.
If leading technology companies can demonstrate that capital expenditures are being converted into revenue and profits, the market's concerns about the AI investment cycle may ease. Investors need to watch Nvidia's earnings report, hyperscale cloud service providers' capital expenditure guidance, data center financing conditions, and semiconductor orders.
Second, U.S. economic data.
If employment and economic growth data remain strong, the market's judgment that political gridlock will significantly weaken the U.S. economy may be challenged. At the same time, if inflation proves stubborn, the previous rise in U.S. Treasury yields may also reverse.
Third, a decline in policy uncertainty.
If investors gradually come to believe that the new Congress, while it may create political noise, will in practice find it difficult to cause substantial damage to AI investment, then part of the regulatory risk premium previously priced into the market may fade.
In addition to these three reversal catalysts, there are four issues worth continuing to track before the end of the year:
Is AI spending actually slowing, or is the market simply beginning to demand better investment returns? Focus on Nvidia's earnings report, cloud giants' capital expenditure guidance, data center financing, and semiconductor orders.
Is the decline in U.S. Treasury yields due to improved inflation expectations or deteriorating economic growth expectations? The two scenarios have completely different implications for equity and credit markets.
Can the dollar's weakness persist? If the dollar continues to fall, it will provide stronger support for Asian stock markets, emerging market currencies, and gold.
Will political gridlock evolve into a fiscal confrontation? Budget negotiations, debt ceiling progress, congressional committee investigations, and new state-level restrictions on data centers could all become sources of the next round of market volatility.
The next two months will test whether this midterm election merely accelerated an asset rotation already underway in the market, or whether it signals a deeper shift in market leadership.
For investors, a Democratic sweep of Congress is not simply a bearish or bullish signal. Today's global market performance—falling first and then rising—precisely shows that the market is simultaneously weighing the effects of policy uncertainty and slower fiscal expansion.
Next, whether AI investment can deliver returns, how U.S. fiscal policy evolves, and whether the dollar and U.S. Treasury yields can continue their current direction will do more than the election results themselves to determine the market's next move.
