CICC: Joint Interpretation of the U.S. Midterm Elections

Author: CICC Insight

Overseas Macro: After the Sweep: The Triple Impact of the U.S. Midterm Elections

The U.S. midterm elections have concluded, with the Democratic Party reclaiming control of both the Senate and the House, achieving historic breakthroughs in several traditionally red states, the breadth and intensity of the "sweep" exceeded market expectations. High living costs, unmet campaign promises, combined with the candidate selection process that emphasizes "loyalty" over "electoral sentiment," are the main reasons for the Republican Party's defeat, which also sends a clear signal to the Trump administration. Looking ahead, Democratic control of Congress will enhance checks and balances, the risk of escalating U.S.-Iran conflicts may decrease; fiscal expansion space will be limited, and the debt ceiling negotiations may bring temporary market disruptions; the uncertainty of state government data center regulation is rising, but the possibility of comprehensive restrictions on AI is low. Overall, we maintain our previous judgment that the conclusion of the elections may promote a decrease in policy uncertainty, providing a clearing opportunity for the market (see "Potential Impacts of the U.S. Midterm Elections").**

1. The Democratic Party's Comprehensive Victory, Flipping Multiple Traditional Red States

In this midterm election, the Democratic Party has regained control of both the Senate and the House, achieving a "sweep." Before the election, the Republican Party held 53 seats in the Senate, while the Democratic camp had 47 seats (including 2 independents) [1]. According to the latest results, the Democratic Party flipped at least 7 seats (in North Carolina, South Carolina, Texas, Ohio, Kansas, Iowa, and Maine [2]), reaching 54 seats and forming a majority.

In the House of Representatives, before the election, the Republican camp had 219 seats (including 1 independent), while the Democratic Party had 214 seats, with 2 seats vacant [3]. The latest results show that the Democratic Party has flipped over 24 seats from the Republicans, covering several states including New Jersey, Pennsylvania, North Carolina, and Iowa, with the winning range extending from traditionally competitive districts further into Republican strongholds [4]. Media outlets like the Associated Press have predicted that the Democratic Party has regained control of the House [5], but the final seat distribution and majority margin are still to be confirmed.

Furthermore, the Democratic Party's winning range exceeded expectations, capturing multiple traditional red states. In the 2024 presidential election, Trump had a significant lead in South Carolina, Texas, Ohio, and Kansas [6], but now all Republican Senate seats in these states have flipped to blue, with Iowa also shifting from Republican to Democratic. Notably, South Carolina elected a Democratic senator for the first time since 1998 [7], Texas saw a Democratic win in a statewide office for the first time since 1994 [8], and Kansas elected a Democratic federal senator for the first time since 1932 [9].

The gubernatorial elections also saw widespread flipping. A total of 36 states held gubernatorial elections, with Republicans and Democrats each controlling 18 of the contested gubernatorial positions before the election [10]. The Associated Press has confirmed that Democrats flipped Republican-held governorships in Georgia, Ohio, Texas, and Iowa, while retaining key states like Pennsylvania and Wisconsin. Among them, Texas Democratic candidate Gina Hinojosa defeated Republican Governor Greg Abbott, who was seeking a fourth term, becoming the first Democratic governor elected in the state since 1990 [11]; Georgia Democratic candidate Keisha Lance Bottoms became the first African American woman elected as governor in U.S. history [12].

These results indicate that the Democratic Party achieved a comprehensive victory in this election. Although the market had anticipated the Democratic Party's "sweep," the extent and magnitude of their victories still exceeded market expectations.

2. High Living Costs and Candidate Controversies Weaken the Republican Party

We believe that the Republican Party's defeat mainly stems from two reasons: first, high living costs and unmet campaign promises. During the 2024 presidential election, Trump promised to lower inflation, energy, and housing costs, but the actual burden on residents has not significantly improved over the past two years. As of October 2024, the U.S. CPI inflation year-on-year was 2.6%, which has now risen to 3.7%; during the same period, the 30-year mortgage rate increased from around 6.4% to 7.3% [13]. Trump had previously criticized the Biden administration for high inflation and high interest rates, and some voters hoped that a party change would improve living costs, but now the unmet promises have led some voters to turn back to the Democratic Party in search of a policy shift.

Second, the selection of candidates has overly emphasized "loyalty" [14]. Texas, a traditional deep red state, is the most representative example: Trump backed the state attorney general Ken Paxton, who is embroiled in corruption allegations and personal controversies, to replace long-serving Republican senator John Cornyn [16]. However, the election results show that Democratic candidate James Talarico focused on issues of living costs and government corruption, ultimately winning, thus flipping the traditional red state to blue [17]. Similar situations occurred in South Carolina and North Carolina. This indicates that even with "strong ties," Trump's personal endorsement did not fully translate into local support for candidates. Some candidates had significant controversies and weak local foundations, further amplifying the electoral pressure on the Republican Party.

3. The Triple Impact on the U.S. Economy and Policy

We believe that the Democratic Party's reclaiming of congressional control will impact U.S.-Iran conflicts, fiscal space, and AI regulation in three ways.

First, voters expressed dissatisfaction through their ballots, enhancing congressional checks and balances, which may reduce the risk of escalating U.S.-Iran conflicts. In this election, the U.S.-Iran conflict drove up oil prices, which was one of the significant factors dragging down the Republican Party's election prospects. The election results sent a clear signal to the Trump administration: if the conflict escalates further, the Republican Party's situation in the subsequent 2028 elections will only become more passive, and Trump and his team cannot ignore this.

From a political logic perspective, the Democratic Party's control of both chambers means that Trump faces stronger domestic institutional constraints. On the fiscal side, the Pentagon's previous request for $80 billion in emergency funding remains stalled in Congress, and the Democratic Party can restrict the use of funds and require regular reports to Congress, thereby constraining further military actions. In terms of investigative oversight, the Democratic Party may use hearings, subpoenas, and document retrieval rights to investigate Trump's family business interests, government procurement contracts, cryptocurrency operations, and the relationships between businesses and the government, leaving Trump little time to focus on external affairs [18]. Of course, Trump could choose to escalate military actions during the 60-day congressional transition period, but voters are already very dissatisfied with high oil prices, raising questions about the significance of such actions.

Second, fiscal expansion space is limited, and the debt ceiling negotiations may bring temporary disruptions to the market. After the Democratic Party takes control of Congress, they will be better positioned to prevent the Republican Party from advancing a new round of large-scale fiscal plans through budget reconciliation procedures, and Trump's previously proposed defense funding plan will also face resistance. This means that the space for new fiscal stimulus over the next two years will narrow, and the deficit path may gradually converge towards the existing policy baseline. For U.S. Treasuries, with escalating conflicts and more constraints on fiscal expansion, this is beneficial in alleviating long-term inflation and interest rate pressures, enhancing the allocation value of U.S. Treasuries.

However, the negotiations between the two parties over the debt ceiling may become more intense, potentially bringing temporary market fluctuations again in 2027. As of October 20, 2026, the federal debt constrained by the statutory limit is approximately $40.24 trillion. According to predictions from the Congressional Budget Office (CBO) and other institutions, the federal government may reach the statutory debt ceiling by mid-2027. After hitting the ceiling, the Treasury can still rely on cash balances and unconventional measures to maintain operations for a period, and it will not trigger a substantial payment crisis in the short term, but it may still create disruptions to economic operations. In October-November 2025, the U.S. experienced the longest federal government shutdown in history, which was temporarily resolved by a Continuing Resolution; during the shutdown, the release of economic data was delayed, and market liquidity also experienced marginal tightening. Similar situations may occur again around the second quarter of next year.

Third, the uncertainty of AI regulation is rising, but the possibility of comprehensive restrictions on AI development is low. We previously mentioned that as data center construction drives up electricity prices in some regions, the Democratic Party may strengthen oversight of data center approvals, and this regulatory risk is more concentrated at the state and local government levels. In this election, states like Texas, Georgia, and Ohio saw Democratic governors flip to blue, while Pennsylvania's Democratic governor successfully won re-election; these states are all important markets for data center construction in the U.S.

Georgia's governor-elect Keisha Lance Bottoms proposed during her campaign to pause the development and construction of new data centers until the economic and community impacts of data center projects are reassessed [19]. Texas's Gina Hinojosa opposed high-energy-consuming data centers, emphasizing energy costs and residents' interests, and advocated for the elimination of certain tax incentives for data centers [20]. Ohio's Amy Acton supported a conditional pause policy for newly constructed data centers, requiring developers to bear all utility costs [21]. This indicates that state-level regulation of data center construction may strengthen, impacting the progress of AI computing power investment in the U.S.

However, we believe that the implementation of policies still needs to be observed, and it is not advisable to be overly pessimistic. First, the controversy over data centers is not a core priority issue for the Democratic Party; the governors' statements are more about requiring tech companies to bear the social costs of data center construction, rather than abandoning AI investment. Additionally, data center construction can drive local employment and promote tax revenue, which means there is still considerable room for compromise, and the actual execution of policies in various states remains to be seen.

Second, a slowdown in data center construction does not mean that demand has disappeared, but rather that it is "delayed satisfaction," which may lead to differentiation within the AI industry chain rather than a comprehensive negative impact. Due to the inability to rapidly increase supply, the scarcity and pricing power of existing data centers will further strengthen, allowing operators of data centers already in operation to raise rents and increase revenues. Large cloud providers that secured electricity and land resources earlier can continue to provide services to customers even when capacity is limited, thereby consolidating their competitive advantage.

Third, the market often prices based on the worst-case scenario in the early stages, which actually leaves room for subsequent recovery. If the actual governance strength of the new governors is weaker than the market's previous pricing, both sentiment and valuation are expected to see marginal improvements.

In summary, we maintain our previous judgment: The election results may reduce policy uncertainty and create opportunities for risk clearance. In the pre-election phase, the market has been repeatedly speculating on issues such as the U.S.-Iran conflict, the Russia-Ukraine conflict, and AI regulation, with all parties involved hoping to maximize the value of their stakes before the election, leading to significant uncertainty. Once the election results are finalized, these speculations will converge, and the direction of policies will become clearer: military actions will be constrained by Congress, fiscal policy will shift to neutral, and AI regulation will generally be restrained. Therefore, the midterm elections are more likely to be an opportunity for risk clearance, which may have a positive effect on the overall market (see "Potential Impact of the U.S. Midterm Elections").

Chart: Senate Election Map

Source: WSJ, AP, CICC Research Department
Chart: House of Representatives Election Map

Source: WSJ, AP, CICC Research Department
Chart: Comparison of U.S. Economic Indicators Before the 2024 Election and Before the 2026 Midterm Election

Source: Wind, CICC Research Department

Commodities: What is the Impact of the U.S. Midterm Elections?

On November 4, the results of the U.S. midterm elections were announced. As of the report's release, the Democratic Party has gained a significant advantage and is likely to sweep both houses and gain control of Congress. We believe that the impact of this midterm election result on the commodity market mainly operates through three transmission paths: foreign policy, fiscal policy, and trade policy. In terms of foreign policy, there will be constraints on unilateral military escalation, leading to a cooling of the Middle Eastern geopolitical conflict premium; in terms of fiscal policy, large-scale new stimulus measures will be limited, suppressing expectations for U.S. domestic demand; in terms of trade policy, the resistance to the president's ad hoc tariff increases will rise, and the risks of unilateral trade friction will converge. We judge that after the midterm elections, the risk premiums associated with fiscal stimulus, trade friction, and geopolitical conflict in the commodity market may decline, and the main line of the commodity market may return to fundamentals.

Oil: Diplomatic Constraints Reduce the Risk of Escalation in Middle Eastern Conflicts, and Geopolitical Premiums for Oil Decline

Price fluctuations have significantly increased over the past two weeks. Last week, market concerns about a potential new round of escalation in the U.S.-Iran conflict after the midterm elections dominated oil prices, pushing them to nearly $120 per barrel. Since this week, as the election results approach, geopolitical developments remain tumultuous. On November 2, the U.S. and Iran announced that they had resumed indirect negotiations, with Iran stating it was "trying to resolve issues through dialogue," and the U.S. expressing a "preference for a diplomatic solution," leading to a one-day drop in oil prices of 7%; on November 3, the U.S. conducted airstrikes on Iran's Qeshm Island, signaling a return to limited military actions, and the geopolitical direction remains unclear. Currently, the results of the U.S. midterm elections may reduce the risk of escalation in Middle Eastern conflicts by 2027.

Since the U.S.-Iran conflict, global oil inventories have continued to decline, with OECD oil inventories having consumed a cumulative 260 million barrels, a reduction of 6%. By the end of September, inventory levels were already about 7% below the five-year average for the same period, and as the release of the Strategic Petroleum Reserve (SPR) comes to an end, the pressure to reduce inventories since September has further shifted to commercial inventories, providing greater elasticity for crude oil risk premiums. Fundamentally, although Middle Eastern oil exports have rebounded under high-risk trade models such as ship-to-ship transfers, upstream production remains constrained by regional situations and transportation risks, and the pattern of spot shortages may persist at least until Q1 2027. We suggest that Brent crude oil prices may struggle to fall below the high of $90 per barrel in the next 3-6 months. Looking further ahead, the midterm election results may increase the likelihood of a de-escalation of the geopolitical situation in the Middle East by 2027. If Middle Eastern supply can return, it may lead the oil market back to a surplus situation. We judge that under this scenario, Brent crude oil prices may return to the range of $80-90 per barrel in the second half of next year.

Gold: The Core Remains the Direction of Interest Rates

Since the second quarter of this year, the core pressure on gold prices has come from the Federal Reserve's shift in monetary policy direction from rate cuts to rate hikes. Since the resumption of rate hikes in September, speculative net long positions in COMEX gold futures have been reduced by 17%, which we believe has already priced in the expectation of 2-3 rate hikes, raising the federal funds rate ceiling to 4.5% (4.0% after one rate hike). The pricing for rate hike space is relatively sufficient. The recent further adjustment in gold prices may partly stem from liquidity pressures amid severe fluctuations in U.S. stocks (for example, on October 22, the SPDR Gold ETF significantly reduced its holdings by 12 tons) and partly from expectations that oil prices may rise again due to repeated geopolitical tensions. Looking ahead to next year, the midterm election results may have a mid-term impact on the gold market, which may still depend on how they affect the geopolitical situation in the Middle East, U.S. fiscal strength, and AI regulatory risks, thereby transmitting through energy inflation and economic growth expectations to influence the direction of U.S. monetary policy. If the geopolitical risks of unilateral conflicts and trade frictions globally decrease next year, and there are expectations of easing high-interest rate pressures, gold may have room for price recovery at current levels. Under the baseline scenario where the Federal Reserve pauses rate hikes next year (with a federal funds rate ceiling of 4.25%), we expect the reasonable annual average position for COMEX gold prices in 2027 to be around $4,300 per ounce.

Non-Ferrous Metals: Short-Term Uncertainty on Copper Tariffs Increases, but Long-Term Impact May Be Limited

The impact on copper is mainly concentrated on the increased short-term uncertainty regarding tariffs. In the short term, after the midterm elections, the market expects that the U.S. Section 232 tariff investigation, which has significantly impacted copper prices since 2025, may change, but currently, tariff authority still lies with the president, and we expect that existing tariffs on copper semi-finished products are unlikely to be directly revoked. However, as congressional checks and balances strengthen, we judge that the difficulty of further taxing refined copper has increased, and the risk premiums brought by tariffs may decline. In the long term, considering that domestic demand for copper in the U.S. is increasing and that both parties have a generally consistent attitude towards strategic metals dominated by copper, if tariffs remain undecided, we expect the market to still lean towards positive pricing, and the high inventory levels of COMEX copper are unlikely to significantly impact copper prices. Additionally, the Democratic Party's long-term support for emerging industries such as power grids and renewable energy may also create some incremental demand for copper in the future.

Agricultural Products: Uncertainties in Bioenergy and U.S.-China Agricultural Trade Policies

The impact on the agricultural product market mainly lies in trade and industrial policies. First, the final ruling on RVO 2026/2027 has been set by the EPA in March-April 2026, and 45Z has been extended to 2029; these are existing policies that are not affected by the midterm elections, but there may be uncertainties regarding E15 and ILUC policies, which could cause medium- to long-term disturbances in corn and soybean oil consumption. Second, the list of states flipping blue includes traditional agricultural states like Iowa and Kansas, which poses a political constraint on Trump's trade policies. Currently, we expect the probability of easing U.S.-China agricultural trade relations to increase by 2027. For U.S. soybeans, this is the most direct marginal benefit brought by the election, but in the medium to long term, the changes will affect trade flows and premiums without altering the global balance sheet. Overall, this election is likely to only cause marginal disturbances, and the main pricing line for 2027 will still be weather, costs, and global supply and demand.

Foreign Exchange: With the Democratic Party Controlling Both Houses, Mid-Term Support for the Dollar May Gradually Weaken

The Democratic Party achieved a significant victory in this midterm election, winning control of both houses of Congress, which will significantly enhance the checks and balances faced by the Trump administration over the next two years. We believe that this election generally increases the likelihood of weakening mid-term support for the dollar. Fiscal expansion and tariff policies will face more constraints, which may reduce additional upward pressure on U.S. demand and inflation; external military actions will be subject to more checks, which may also lower energy risk premiums. At the same time, AI investment will continue to support U.S. growth and asset returns, but its marginal boost to the dollar may gradually weaken. Specifically, the election's impact is mainly reflected in four aspects: fiscal and trade policy, AI investment, U.S. asset risk pricing, and geopolitical energy.

Fiscal and Trade Policy: New fiscal stimulus space is limited, and resistance to further tariff expansion is rising. Trump's previous major tax cuts have already been implemented through the "Great American Rescue Plan," and the space for new large-scale tax cuts and fiscal spending over the next two years is inherently limited. After the Democratic Party gains control of both houses, the Republican Party will face greater resistance in further promoting partisan tax cuts and spending expansions. Congressional oversight and review of tariff policies may also strengthen, further increasing the political costs of expanding tariffs. If new fiscal stimulus and tariff measures are weaker than previously expected, the additional upward pressure on U.S. demand and import prices may weaken, and the market's pricing for U.S. growth, inflation, and further rate hikes may become more moderate, leading to a marginal weakening of short-term interest rate support for the dollar.

AI Investment and Cross-Border Capital: AI investment continues to support U.S. growth, but regulatory uncertainties may weaken the dollar's marginal support. After the Democratic Party gains control of Congress, regulatory scrutiny of large tech companies may strengthen. At the same time, the approval of data centers, power supply, and infrastructure support will depend more on state and local governments, and the policy orientations and advancement rhythms of different states may diverge, increasing uncertainty for companies regarding project approvals, construction costs, and investment returns. This rising uncertainty may affect market risk preferences and tech company valuations, prompting overseas investors to reassess the risk-return ratio of U.S. tech assets. If overseas capital slows its new allocations to U.S. tech assets as a result, the support of cross-border capital inflows for the dollar may also weaken. However, CICC Overseas Macro believes that the likelihood of a comprehensive AI moratorium being implemented at the federal level is low, and local regulations are insufficient to change the overall investment trend in the industry. The five major cloud providers' direct AI capital expenditures are still expected to grow, and the demand generated by previous investments in equipment, electricity, and construction is also expected to continue spreading to the manufacturing sector, providing support for U.S. growth and corporate profits. However, as the investment base rises, the growth rate of direct capital expenditures may slow compared to before, and the pull of new investments on the relative growth advantage of the U.S. may gradually weaken. Overall, AI investment will still provide growth and capital inflow support for the dollar, but rising regulatory uncertainties and slowing investment growth may lead to a gradual decline in its marginal contribution.

U.S. Debt Supply and Fiscal Risks: New supply pressure may ease, but debt ceiling disturbances remain. After the Democratic Party gains control of Congress, the Trump administration will face increased difficulty in further promoting tax cuts and expanding fiscal spending. The risk of new fiscal deficits and government bond supply exceeding expectations may ease, and the upward pressure on the term premium of U.S. bonds may also diminish. This helps alleviate market concerns about the further accumulation of U.S. fiscal risks, but its impact on the dollar may be relatively indirect and still depend on changes in U.S. bond relative yields and overseas capital allocation. Meanwhile, the burden of existing U.S. debt and interest expenses remains heavy. CICC Overseas Macro expects that the U.S. may reach its debt ceiling again by mid-2027. At that time, the negotiations between the two parties regarding the debt ceiling, government appropriations, and fiscal arrangements may intensify, increasing the risk of government shutdowns and market liquidity disturbances. If a negotiation deadlock further raises market concerns about the U.S. fiscal governance capacity and debt repayment arrangements, overseas investors may demand higher risk compensation or increase the hedging ratio of dollar assets, putting pressure on the dollar.

Geopolitics and Energy: Congressional Constraints on Military Actions Increase, Oil Price Risk Premium May Gradually Decline. After the Democratic Party took control of Congress, the Trump administration's additional military funding and expansion of military actions against Iran will face more constraints, and congressional investigations and oversight of military power may also increase the political costs for the government to further escalate conflicts. If the risk of escalation in the U.S.-Iran conflict decreases, the geopolitical risk premium in oil prices may decline, alleviating inflationary pressures in the U.S. and reducing the necessity for the Federal Reserve to maintain high interest rates. At the same time, the trade conditions for energy-importing economies like Europe and Japan are expected to improve, and the relative advantage and safe-haven support that the dollar previously gained from energy may also weaken. However, the new Congress will not officially take office until January 3, 2027, and there are still risks of fluctuations in short-term military actions and oil prices.

Overall, after the Democratic Party won both houses of Congress, the dollar has generally weakened against major currencies, and the market has begun to focus on the narrowing fiscal expansion space and the rising uncertainty of AI regulation's impact on the U.S. growth outlook, while the decline in U.S. Treasury yields has further increased downward pressure on the dollar. In the short term, the election results may still trigger further adjustments in market expectations for U.S. policy and growth, but the subsequent trend of the dollar will also be influenced by economic data and expectations of Federal Reserve policy. In the medium term, the constraints on fiscal and trade policy, the diminishing marginal boost of AI investment to growth, and the decline in energy risk premiums may all weaken some of the support the dollar previously gained. However, the advantages of U.S. growth and asset returns will still provide some offset. We believe that this election has increased the likelihood of a gradual weakening of the dollar's medium-term support, and the subsequent impact will depend more on the actual effects of policy changes on the relative growth and interest rate advantages of the U.S.