A stunning rebuke. In what's shaping up to be a historical night for the Democrats, the party is on track to capture the House and flip the Senate. This amounts to a resounding victory for the Democrats, as much as a stunning rebuke to Trump and his policies for the past two years, which range from the hugely unpopular Iranian quagmire to the global tariff war and cost of living crisis in the US.

Riding on the wave of voter angst and galvanised by the return of support from African American and Hispanic voters, the Democrats notched up several historical wins, most notable of which is James Talarico's capture of the Senate seat in Texas – a feat which has eluded the party for more than three decades. Other notable Democratic wins include victories in deep-red states like Kansas, Iowa, Ohio, and South Carolina.

The road ahead. Trump has, in an interview, said that he will accept the election results and he will also be willing to work with the Democrats – this remains to be seen. In the meantime, the key things to keep a lookout for include:

• Will Republicans try to push through the remaining of their agenda in the following “lame duck” session before the new Congress starts in January?
• To what extent will the Democrats prioritise oversight of Trump and his allies over policymaking, particularly on issues pertaining to affordability and AI regulation?
• Will the loss of the House and Senate translate to greater Trump “unpredictability” in the forthcoming years?

Impact on financial markets: a historical perspective. At the time of writing, Asian technology stocks saw selling pressure amid concerns that the resounding Democratic victory will lead to higher scrutiny on AI and the construction of data centres. But the ability of Democratic lawmakers in pushing through these reforms remains to be seen, given Trump's veto power.

If history is any guide, our analysis shows that risk assets have historically performed well in years where Democrats control both House and Senate under a Republican presidency. Post-WWII historical data identifies seven of such instances with the S&P 500 delivering an average 12-month total return of c.16% following the midterms with positive returns across all seven periods.

A divided government prevents sudden legislative surprises, which in this case, means no sweeping new tax package or massive regulatory overhaul as no single party has the necessary votes to reshape policies unilaterally. Investors like policy certainty and the gridlock on Capitol Hill ensures that.

While historical performance is not necessarily indicative of future outcomes, the historical record suggests that political gridlock has not been a structural impediment to equity market performance and may, in certain circumstances, provide a more favourable policy backdrop for risk assets.

EQUITIES OUTLOOK

Impact on US Technology

A matter of supply constraints, not demand deterioration. A Democratic sweep of Congress would introduce a pinch of uncertainty into the ongoing AI capex cycle. Heightened oversight, alongside state and local opposition to electricity costs and environmental impacts, could slow data centre approvals and construction. These frictions, however, represent constraints on the supply of data centre capacity, rather than evidence of weakening underlying demand. Congressional control alone would not outright translate into nationwide restrictions, given Trump’s veto power and the primacy of state-level permitting and utility decisions.

Meaningful portions of AI capex are pre-committed. Secular spending to rollout compute capacity should remain resilient with a substantial share already committed. Signed equipment orders, committed construction contracts, and multi-year leases constrain flexibility. Many obligations would remain in place despite market speculations of changes in top-down policy, although others are contingent on project milestones, while uncontracted projects offer greater scope for adjustment. The more likely outcome is, therefore, a shift in deployment timing and location, rather than an abrupt collapse in spending. For AI infrastructure suppliers, this is unlikely to fundamentally alter the investment outlook with existing commitments and long-term capacity build-up providing fundamental support. Providers addressing critical bottlenecks, particularly power generation and grid access, may prove better positioned than certain semiconductor contract manufacturers, whose orders could be more readily deferred.

Existing compute gains scarcity value. Established hyperscalers with substantial operational capacity, meanwhile, stand to benefit from the resulting scarcity of compute. Existing data centre capacity becomes more valuable as new supply slows against steady new demand, supporting utilisation and pricing as contracts renew. Slower expansion could also moderate incremental AI capex, reducing the need for equity or bond issuance and easing the free-cash-flow pressures that have concerned markets. Highly leveraged neoclouds reliant on future data centre delivery, however, could face greater uncertainty: delays can defer revenue while financing costs continue to accrue. Our preference, therefore, remains with operators that have energised capacity and stronger balance sheets.

An attractive entry point for quality, established operators. Recent corrections in the technology sector have brought valuations to more attractive levels. Opportunities are starting to emerge where valuation de-rating appears to have run ahead of actual deterioration in earnings prospects, particularly amongst companies with secure funding and executable backlogs. Selectivity for quality, rather than a wholesale exit, remains the more appropriate response. Political friction is more likely to reshape the timing and distribution of AI returns than to extinguish the underlying opportunity.

Investment stance: stay invested, but remain selective

1. Retain core exposure with greater selectivity: avoid indiscriminate positioning across the technology value chain, distinguishing valuation-led corrections from genuine deterioration in fundamentals.
2. Prioritise quality hyperscalers with a credible path to monetisation: favour operators positioned to translate paid AI adoption and commercial cloud services into improving cashflow generation over the next two to three years.
3. Stay invested in the energy supply chain: maintain exposure to companies providing the power infrastructure and energy resources essential to hyperscaler expansion and data centre operations.
4. Maintain exposure to critical semiconductor enablers: focus on companies supplying leading-edge chips, essential devices, and chip-design software.
5. Reduce exposure to smaller, highly indebted neocloud players: remain cautious towards businesses that have yet to demonstrate a convincing path to profitability.

Impact on Asia ex-Japan

For Asia ex-Japan, there are uncertainties pertaining to Trump’s potential change of stance in relation to the bilateral relationships with trade partners across the region. In North Asia, Taiwan, and Korea equities within the upstream technology ecosystem may face near-term valuation and sentiment pressure stemming from potential repositioning of US hyperscalers’ data centre construction plans. That said, the general earnings trajectory for the core semiconductors suppliers looks more resilient than the initial market reaction implies, supported by sticky multi-year commitments and already sold-out capacities.

FIXED INCOME OUTLOOK

A pause on the higher yield narrative. The Democratic "Blue Wave" in the 2026 midterms has several implications for fixed income markets. While the Democratic agenda of the past is seen as expansionary, centred on enlarged social spending around healthcare and income security, today’s voters have had to absorb the inflationary legacy of post-pandemic stimulus, Trump-era tariffs, and deficit policies, a clearly different issue that newly-elected members of congress need to address. The Democratic mandate could pivot to one of consolidation, scrutinising expenditure, resisting further deficit expansion, and restoring credibility on cost-of-living. A gridlocked congress, where legislative ambition is checked by thin margins or split chambers, reinforces this outcome structurally.

The rates implication of fiscal constraint is dovish over the medium term. Reduced deficit spending means lower Treasury issuance than the market currently prices. Higher corporate tax rates – a Democratic policy preference – could dampen business investment. Slower private-sector capex, combined with a more regulated financial sector, would weigh on aggregate demand and ultimately growth and inflation expectations. This is the channel through which a Blue Wave could influence a lower rate environment, not immediately, but as the growth impulse from spending fades and the tax drag accumulates, the Fed's reaction function shifts toward accommodation.

Wider sector dispersion favours active credit selection. For credit markets, the “Blue Wave” outcome could continue to support further sector dispersion in spread performance that had already been elevated in 2026. Although a higher-regulation environment raises the cost of capital broadly, we believe financials face tighter scrutiny, while energy and industrials face elevated compliance costs under a more aggressive environmental regulatory posture. Conversely, sectors with explicit policy tailwinds – clean energy, infrastructure, and healthcare – could benefit from directed fiscal support, which can contain spreads for well-positioned issuers in those verticals.

Favour quality tilt in BBB/BB, remain with 5-7Y duration. Investors should remain alert to the policy priorities under the new configuration of the US Congress which could be consequential for yields and spreads. As such, active credit selection, given a sustained environment of sectoral dispersion, would be beneficial; the environment of broadly benign credit spreads is likely behind us which warrants a more selective approach. With active selection, the sweet spot remains with the BBB/BB segment. Given the potential for a lower fiscal impulse in the medium term leading to constrained growth, the upside to bonds could come from a moderation of the current hawkish policy trajectory of the Fed. That said, we are still the most confident in the belly of the curve; the 5-7Y duration bucket remains the most favourable, potentially benefiting from an accommodative policy shift while simultaneously also avoiding the risk of long-end volatility at a time when debt loads are high and fiscal consolidation remains a difficult agenda to pass.

FX OUTLOOK

Much of USD weakness already priced in. Historically, a strong Democratic performance is associated with a weaker USD. Indeed, the DXY Index reacted lower as the results entered. However, given that polls have consistently pointed at this outcome over recent weeks, the heavy USD price action ahead of the midterms already factored in much of the USD negativity. This implies a relatively muted reaction in the aftermath.

The main FX drivers are not contingent on the midterms’ outcome. Our FX view this year is primarily guided by Fed rate trajectory and carry dynamics. Secondary drivers include tariffs & energy prices due to the US-Iran conflict and episodic flareups of the US fiscal sustainability/USD debasement trades. The midterms outcome will not significantly alter the main FX drivers.

To the extent that the Federal Reserve will remain independent, the midterms’ outcome has limited impact on monetary policy. Congress has purview over fiscal policy. A Democratic sweep may result in more tension over budget and debt limits. This may complicate the Federal Reserve’s deliberations on the margin, but it should not shift the policy direction. Ongoing tensions over budget and debt limits may trigger market jitters over US fiscal sustainability. However, given how accustomed the market is to such discussions, any negative impact on the USD is likely to be fleeting.

Key decision-making powers on foreign and trade policy sit with the President, and not with the Congress. Thus, do not expect significant U-turns in the US-Iran conflict or the tariff environment in the near-term. Similarly, carry dynamics is a function of global macro dynamics than US internal politics. Even if UST yields were to compress, it will still be one of the higher-yielding major currencies. This will maintain the yield spread that keep carry dynamics in play.

USD’s relationship with the US technology sector. One potential concern is the positive correlation between the US tech sector performance and the USD. The worsening sentiment in the AI tech sector has tempered US exceptionalism and imparted a negative tone on the USD. The upset by Democrat Gina Hinojosa in the Texas governor race may create more headwinds for the state’s AI data centre boom. A key pillar of her campaign is the opposition to unchecked AI infrastructure buildout. This may further intensify the negativity around the technology sector and weigh more heavily on the USD.

Retain USD range-bound view. Overall, our baseline expectation is that any midterms-driven USD negativity will be short-lived. The USD is likely to revert to its range-bound posture soon with the DXY Index limited between 100.00 and 103.00.

GOLD & COMMODITIES OUTLOOK

Gold – moderately supportive. The democratic sweep is moderately supportive for gold because it could: (i) restrain further fiscal stimulus; and (ii) increase pressure to resolve the US-Iran conflict – potentially easing the pressure for higher interest rates.

On (i), while persistent fiscal deficits and growing sovereign debt are positive for gold’s long-term narrative as a monetary debasement hedge, they have been damaging to its short-term outlook as they have catalysed a spike in treasury yields. With the Democrats now controlling both chambers of congress, yields will likely come down on expectations of greater fiscal restraint going forward. This will help alleviate some of the rate-driven pressure that has plagued the yellow metal for much of the year.

On (ii), the US electorate has clearly indicated disdain for a prolonged war. This puts pressure on Trump to secure an agreement in the Middle East. A Democratic Congress would also limit the current administration’s ability to sustain or expand a prolonged campaign. Having said that, the likelihood of a negotiated settlement over the coming quarters is now higher, all else remaining equal. This has positive implications for energy prices, inflation, and monetary policy, all of which could help improve the negative short-term sentiment on gold.

An important caveat, however, is that Trump could escalate military pressure in the immediate term to seek better negotiating terms, which could see the outlook deteriorate further before improving.

Oil – Greater potential for a risk unwind. If the pressure from a Democratic victory does indeed produce a durable settlement in Iran, oil would face three sources of downward pressure:

1. A smaller geopolitical risk premium: buyers would pay less to protect against another disruption.
2. More reliable gulf exports: safer shipping would allow existing production to reach customers more consistently.
3. Recover of shut-in production: producers could gradually restore output as export routes and infrastructure permit.

However, there are some risks to such a scenario. First, depleted inventory buffers may limit the extent of the unwind. Prices could fall initially as fear recedes, but further declines would require sustained export recovery and inventory rebuilding. Second, oil prices might spike in the immediate term if Trump escalates the conflict in to gain leverage for a settlement negotiation. Overall, we see the potential for lower crude prices in the medium term, but the immediate outlook remains volatile.

Figure 1: S&P 500 12-month returns under Republican presidency and Democratic congress

Source: Companies, DBS

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