US Midterm Elections Approaching, 2028 Presidential Election Expected to Become a New Variable in the Market

Investors' expectations for the Democratic Party to seize control of Congress are heating up, but the market's focus extends beyond next year's fiscal battles, as the 2028 presidential election is also coming into investors' sights.....

Written by: Yang Dapan, Jinshi Data

The US midterm elections are entering the final sprint, with investors assessing the potential deeper impacts of a shift in congressional control on the financial markets, which may trigger a preemptive repricing of policies surrounding the 2028 presidential election.

According to the latest contract quotes from prediction markets Polymarket and Kalshi, the implied probability of the Democratic Party winning both the House and Senate exceeds 60%, while the probability of at least winning the House exceeds 90%. However, the prediction markets reflect traders' bets, and there remains uncertainty regarding the Senate's outcome.

On Wednesday local time, former President Trump campaigned in Ohio, while former President Obama supported Democratic candidates in Georgia. The Republican Party currently holds a 53 to 47 seat advantage in the Senate, and the Democrats need to make breakthroughs in several traditionally Republican strongholds to take control.

Expectations of Congressional Control Shift Heating Up, Fiscal and Regulatory Policies Under Test

If the Democrats control both chambers of Congress, Trump's domestic legislation in the remaining two years of his second term may face a more pronounced stalemate. Fiscal budgets, government debt ceilings, and regulatory disputes over artificial intelligence data centers could become focal points of contention between the two parties.

Even if the Democrats win both chambers, Trump still holds presidential veto power and broad executive authority, meaning major policies will not be immediately reversed. However, a change in congressional control could complicate negotiations over the 2027 budget and debt ceiling, making fiscal stalemates a renewed risk for financial markets.

Chris Grisanti, Chief Market Strategist at MAI Capital Management, believes the Republican Party still has a good chance of retaining the Senate. If this scenario occurs, the stock market may experience a brief relief rally, but the impact of the elections is not expected to last long.

Rami Sarafa, CEO of Cordoba Advisory Partners, believes that if the Democrats expand their influence in Congress, healthcare policies may face adjustments, and the expansion of artificial intelligence data centers may encounter more resistance. However, due to the long construction cycles of related projects, the election results will not abruptly halt the AI investment boom.

2028 Presidential Election Preemptively Entering Policy Pricing

Compared to the short-term legislative stalemate, the 2028 presidential election may bring broader changes in policy expectations.

J.P. Morgan's Geopolitical Research Center lists domestic policy stalemates, Trump's pursuit of a political legacy, and the launch of the 2028 presidential campaign as three key lines of focus after the midterm elections. Their analysis covers issues such as Iran and the Middle East, the Russia-Ukraine conflict, Latin America, and NATO.

J.P. Morgan analysts point out that the midterm elections will initiate discussions about the direction of US policy in 2028 and beyond. Issues that previously had broad bipartisan consensus, such as transatlantic relations and policies towards Russia, are now facing increasing debate within both parties.

The power structure in Congress may change, but Trump will still dominate US foreign and trade policy in the next two years. As the next presidential campaign gradually unfolds, investors need to assess whether existing policies can continue beyond 2028.

Prediction markets currently show a roughly even split on whether the Democrats or Republicans will win the White House two years from now, and potential candidates remain far from clear. This means that market expectations regarding tariff policies, global supply chains, energy security, and international relations may adjust as the presidential campaign landscape changes.

Global Asset Gains Significant, Policy Changes Add Revaluation Variables

Since Trump's victory in 2024, major global assets have accumulated significant gains. According to Reuters, the S&P 500 Index and MSCI Global Stock Index have both risen over 30%, the Nasdaq Index has increased by 42%, the "Seven Tech Giants" have collectively risen about 45%, and the Philadelphia Semiconductor Index has more than tripled.

During the same period, international oil prices have risen by 53%, with all gains occurring after the outbreak of the Iran war in February this year. US defense stocks have risen about 27%, while European counterparts have increased by about 60%, showing significant divergence.

The currency and bond markets have shown different trends. The US Dollar Index has fallen by less than 2% since Trump's victory in 2024, while the yield on US 10-year Treasury bonds has risen by about 100 basis points, reflecting changes in inflation, monetary policy, and economic growth expectations.

However, the performance of these assets cannot be entirely attributed to Trump's policies. The AI investment boom has driven up global tech stocks, while conflicts in the Middle East have altered the supply-demand dynamics in the energy market. If policy expectations change in the future, investors will need to distinguish the different impacts of corporate earnings, economic cycles, and political factors on asset prices.

Market participants do not unanimously believe that the midterm elections will become the dominant factor in the long-term trajectory of the stock market. Grisanti expects that AI capital expenditures and corporate earnings will remain more important market variables around 2027, and the short-term volatility brought about by the elections may not change this trend.