Laurent Denize
Chief Investment Officer ODDO BHF Asset Management & Global Co-CIO ODDO BHF
Over the past few days, our Global Investment Committee has closely discussed the US midterm elections and their possible impact on financial markets. Ahead of the vote, we considered a Democratic victory in the House very likely and a Democratic majority in the Senate more likely than not. This assessment was broadly consistent with the overall political and polling picture, while several individual Senate races remained difficult to predict.
With the Democrats now projected to take control of both the House and the Senate, the political direction is broadly in line with our expectations, even if the scale of the Democratic gains is notable.
For investors, this is an important first message: the political shift in Washington is significant, but it is not a fundamental surprise for financial markets.
The first market reaction in very early Asian trading was nevertheless strong. Technology and semiconductor stocks came under particular pressure as investors focused on the risk of tighter regulation around artificial intelligence and data centres. US equity futures fell sharply, while technology-heavy Asian markets also suffered significant losses.
However, these moves did not develop into a broad risk-off event. S&P 500 futures initially fell by more than 1% before recovering a significant part of their losses. The turnaround in South Korea was even more striking: the KOSPI fell by more than 4% at its low before recovering to around unchanged. This suggests that investors quickly began to distinguish between the political headline and its longer-term economic implications.
Importantly, President Trump has indicated that he accepts the election result and is willing to work with the new Democratic majorities. This reduces the risk of a prolonged political confrontation and has also helped to calm markets.
So why are some investors concerned?
One reason is the US investment boom in artificial intelligence. Some investors fear that Democratic gains, particularly at state level, could make the rapid expansion of data centres more difficult. The questions are practical: where can new data centres be built, where will the electricity and water come from, and who will finance the required infrastructure?
These concerns should be taken seriously, but not overstated. An election result does not switch off the US AI investment cycle overnight. Many projects are already planned or under construction, while demand
for computing capacity, electricity and grid infrastructure remains high. More regulatory friction and greater selectivity therefore appear more likely than a sudden stop in investment.
At the same time, investors had already become more critical of the AI story before the election. The key question is increasingly whether the large amounts being invested can generate attractive returns. We remain convinced of the long-term economic potential of artificial intelligence. But markets will increasingly differentiate between companies that can turn investment into sustainable profits and cash flows and those that depend heavily on external financing.
Political scrutiny could also increase, particularly for financials, technology, AI and cryptocurrencies. But the immediate economic impact should not be overstated. Without control of the White House, Democrats have limited ability to fundamentally change corporate taxes or the regulatory framework. Greater scrutiny is therefore more likely than a sudden change in the rules of the game.
The Democratic Senate majority also gives the party greater influence over key appointments to regulatory institutions. This could slow parts of the administration’s deregulation agenda and make some corporate transactions more difficult. However, President Trump retains the presidential veto, limiting the ability to implement major legislative changes without broader political agreement.
The implications also extend beyond equities.
The bond market initially reacted positively. Democratic control of Congress could make additional fiscal stimulus more difficult. This may reduce some concerns about the US fiscal trajectory and therefore some pressure on longer-term US interest rates.
The US dollar initially weakened as Treasury yields declined. We would, however, be cautious about drawing a broader conclusion from the election result. The dollar will continue to depend largely on US growth, inflation and Federal Reserve policy. Tariffs and immigration policy also remain largely under the control of the administration and can influence import prices, wages and the labour market, and therefore the economic environment to which the Federal Reserve responds.
Gold continues to play an important role as a portfolio diversifier. We are also watching oil prices closely. Recent hopes of diplomatic progress between the US and Iran have pushed energy prices lower. A lasting easing of tensions would reduce inflationary pressure and support many financial assets. Renewed escalation could quickly reverse this effect. For markets, developments around Iran and energy prices may ultimately prove at least as important as the election itself.
What does this mean for our portfolios?
This is perhaps the most important point for our clients. The political direction of the result was close to our preferred scenario and broadly consistent with our existing positioning. For our overall asset allocation, this is therefore more of a clearing event than the start of a new market regime.
We consequently see no reason for broad portfolio adjustments today. If changes become appropriate, they are more likely to be selective, particularly within technology and AI-related investments, where regulation, financing costs and the ability to generate sustainable cash flows require close attention.
Looking towards 2027, we remain constructive. The US economy starts from a resilient position, corporate earnings continue to provide a solid foundation, and recent market corrections have reduced some previously high expectations.
As long-term investors, however, we also look beyond 2027. The election may provide an early indication of how the US political landscape is evolving towards the 2028 presidential election. A future scenario combining a Democratic president with continued Democratic control of Congress would have more far-reaching implications for corporate taxation, competition policy and regulation. For now, these are scenarios to monitor rather than reasons to change portfolios today.
Our conclusion: The midterms change the political balance in Washington, but they do not change the fundamental forces driving financial markets overnight. Growth, inflation, interest rates and corporate earnings remain more important for investors than party politics.
For us, the direction of the election result is more confirmation than surprise. We remain close to the markets and ready to act where necessary, but see no reason for broad tactical changes today. Our constructive view towards 2027 remains unchanged.
Midterms: Blue wave coming?