Monthly Macro: Midterms, Markets, and What Comes Next

00:21, Chris Thonis

Hi everybody. Today is Friday, October 23rd, 2026. And welcome back to another episode of Monthly Macro.

We're now less than two weeks away from the November 3rd midterm elections. With control of Congress up for grabs, Democrats are favored to take the House while the Senate remains much tighter. But for markets, the bigger question isn't necessarily who wins, it's what the outcome could mean for policy, interest rates, and investors. So today, we'll look at the electoral landscape and where the results could have the biggest market implications.

Joining me to discuss is William Blair macro analyst Richard de Chazal. Richard, good to see you.

00:54, Richard de Chazal

Thanks, Chris. Great to be back.

00:56, Chris T

Let's start with where things stand. Democrats appear to be better positioned in the House, while the Senate remains much less certain. As you look at the landscape today, what do you see as the most likely outcome and where can we still see some surprises?

01:09, Richard D

Yeah, I mean, I think basically, you already hit it on the head. The polls, the way they're looking now, is the House is almost certainly going to go to the Democrats. So, if you look at the national generic ballot for Congress, you know, they have them at 50.5% versus the Republicans at 41.3%. If you actually look at the betting markets, you know, they have the Democrats winning the House with a 93% probability. So pretty high. Most of the toss-up House seats are held by Republicans. So the Democrats don't actually need to sweep the competitive races to reach that 218 majority.

So, I guess where the surprise could be is for the Senate, where those races are much closer. So, the Democrats here need to get a net gain of four seats. So that would give them 51 seats. Remember, they need 51 because the Republicans have the extra vote of JD Vance as vice president. For the Senate, the Democrats actually have to defend more competitive seats. So, seven of their races are effectively toss-ups. And that means that Democrats probably need to win at least five of them.

That's possible, you know. But there's very little room for error here compared to what we're seeing in the House. So, net-net, basically, you know, looking at November 3rd, or the day after on November 4th, you know, a Democratic House and either a narrowly Republican or narrowly Democratic Senate. And, you know, the end result there is pretty much gridlock.

03:02, Chris T

So, let's assume we do end up with a divided government. As you said, it's easy to hear "gridlock" and assume that means the policy agenda essentially stops. What would divided government actually change in Washington, and where would the administration still have room to act?

03:17, Richard D

I think it actually changes a bit less than you think. The president still has plenty of room to act. So, if the Democrats win the House, you know, they can definitely block any new tax and spending bills. And I think what we'll also see is a lot more investigations, hearings, subpoenas, and sequestering of emails. You know, President Trump already said a few weeks ago, you know, "You've got to win this. They're going to impeach me." And if that happens, that would be the third time he actually gets impeached. So he was the first president to be impeached twice already.

So, I think, I mean, I think on the impeachment thing, it's still political theater about...

04:05, Chris T

Yeah, it doesn't matter, does it? You know, at this point.

04:08, Richard D

At this point, I think you're right. You know, it doesn't. Because also, I mean, it would matter if the Senate would sort of vote on that, but you still need a two-thirds majority in the Senate, and that's not going to happen. So, you know, it's just a sort of extreme name-calling.

But I think it's interesting, though. There was an article in The Wall Street Journal this week that was basically saying that a lot of the Republicans now are lawyering up. So basically they're expecting a big onslaught of these investigations against them and are sort of getting ahead of that by getting some legal protection.

But I think, you know, to get back to your question, when it comes to the president, you know, obviously he still retains a huge amount of authority.

So he has already effectively been bypassing Congress for most of his second term. So even though, you know, Congress has been Republican, he's actually passed more executive orders than any president since Jimmy Carter. And I looked at the number, you know, just before coming on here. How much has he actually passed? 285. So that's quite a lot, in just this term.

You know, I mean, some of those go nowhere. Some of them are just, you know, sort of executive orders on nothing. And, you know, the courts can block those, but that's still a lot. And, you know, on top of that, he still has control of trade policy. He can impose sanctions. He has direct control of foreign policy, and that includes the military.

And lastly, I guess I would say, too, that he also has the power to make executive appointments. So, we don't really have any big appointments coming up. And I looked at what's happening with the Supreme Court. I think the oldest justice there is Clarence Thomas. He's, you know, just 78. So, I think in Supreme Court terms, he's a bit of a whippersnapper still.

So don't expect any there. But on the Fed, he does have Jerome Powell, who's now Governor Powell. His term expires in January 2028. So, you know, the president would get to appoint a new governor there.

At the end of the day, I think, you know, what we're seeing is a transition from legislation to oversight, where now you have a Democratic House just sort of looking over what's happening.

06:46, Chris T

All right. So, let's bring it back to markets. You know, gridlock is often viewed as a positive because it reduces the likelihood of major policy changes. Do you think that holds true this time? And what could divided government mean for bonds and equities?

06:59, Richard D

Yeah. So, I'd say thinking about the bond response, it's a little bit mixed and in opposite directions to a certain extent.

So, I think, you know, with gridlock, any major new tax and spending initiatives are clearly going to be hard to pass. So, in the absence of a major recession, and you get some sort of bipartisan support for a major stimulus or something like that, you're not going to get any new "One Big Beautiful Bill" being passed, right? So, I think for the bond market that's encouraging. You know, they're not going to be too worried about even more Treasury supply coming to the market. So that's going to help reduce some of the upward pressure on the term premium, which is actually already coming down a bit.

But the downside is that with the advent of a divided government, you're going to see more noise in terms of government shutdowns. So, you know, appropriations bills aren't going to be passed. You're going to have budget issues. And, you know, we're going to be back to debt-ceiling standoffs.

So, you know, we don't know what the actual X-date is, but it's going to be sometime in the first half of 2027. So, we're going to have another debt-ceiling issue coming up there.

I mean, there's one, I guess we call it a super fat-tail risk, i.e., a low-probability, high-impact. But that would be, if there was a Republican sweep. Remember, the president has actually proposed $5,000 checks to be issued to every voting American. And if you take that literally, that would be roughly $1.2 trillion, which would actually dwarf the amount that individuals were given during COVID.

So, if you maxed out all the amount that people were issued during COVID, they got about $3,200 each. So, the total of all the pandemic relief came to about $5 trillion, right? So this is less than that. But for individuals who would likely go out and spend that money immediately, you know, that would be inflationary. And I think that would be reflected in bond yields, for sure.

So, for equities, I think gridlock is generally good. I think what equity investors want is a quiet life, right? They want clarity. And, you know, I think gridlock helps to lower the policy surprise factor, even though we're going to get more sort of noise, if you will, coming out of Congress.

10:09, Chris T

There's several industries where the election could have more of a direct impact: AI, infrastructure, defense, healthcare. Where do you see the biggest implications, and is the election more likely to change the underlying demand outlook or simply the timing of investment?

10:24, Richard D

Yeah. So surprisingly, you know, the midterms don't usually matter all that much. But I think this time around they kind of do matter more. Yeah. And I'll give you two words why: data centers.

Data centers, obviously, are driving both the economy and, you know, we see it right now with more volatility in the market. The market is super sensitive to what's going on there, and any potential changes coming out of Washington that can affect those are obviously going to impact the market more.

But I think what you're seeing is, you know, if you look at the two parties, they're not really unified amongst themselves about what their policy stance is on data centers. So, you know, you have some that are strenuously against them, some that aren't bothered, and some that are even really embracing them. There's not much cohesion there.

But what I think the market could be afraid of is that these midterms are maybe sort of a more galvanizing event where, if you have some candidates that really win big out of anti-data-center rhetoric, that could be used as momentum or a big platform issue when we start to think about the 2028 presidential and congressional elections.

You know, I think at the end of the day, it is a big issue. People are seeing their electricity bills and their water bills, they're all going up. They're worried about the environmental impact of all of these things. So, it's a hot topic.

And I think the one race I'm watching here, which has been interesting, has been the gubernatorial race in Texas, where you basically had three-time winner Greg Abbott, who's kind of been the poster boy for promoting data centers in his state. And Texas has actually done super well out of them.

So, in theory, you would think he would be a shoo-in for reelection. But then suddenly, out of nowhere, comes this Democrat candidate, Gina Hinojosa, who is suddenly neck and neck with him in the polls. And why is that? Because she's anti-data-center.

So how does he respond? You know, he put a moratorium on them back in August. And then in September, he stopped issuing any environmental permits for them, as well.

So, a lot of this is electioneering rhetoric. And, you know, those will almost certainly come off after the midterms. But I think what the market is sensing, and what is clearly happening, is that you're going to get more regulation around these things. So that's on the data-center tech side.

And I think the other two areas are healthcare and defense. And healthcare is pretty consequential for them, too. Obviously, a lot of spending here is tied to government contracts, regulation, and health insurance.

And remember that the Affordable Care Act cuts came into effect this year. So, we saw about 3.8 million to 5.8 million people lose coverage this year. And for our analysts on the healthcare team who cover this, they already see these cuts showing up in weaker revenue growth for some of the medical device companies. They're seeing lower procedural volumes.

You know, while 2026 saw $17 billion in cuts to Medicaid subsidies, that jumps to $47 billion this coming year in 2027. So that's already pressuring hospital systems.

And I don't think any Democratic-led Congress is going to be able to do much to reduce the scale of these cuts because they're already legislated. But, you know, they can prevent deeper ones.

So, I think investors are going to be watching the messages here. And I think healthcare companies haven't really been trading all that much ahead of the midterms. I think everyone's kind of sitting on their hands and saying, you know, there's some risk here. Let's see what happens.

And then lastly, on defense, you know, my colleague in research, Louis DiPalma, has basically talked about this and pointed out that, again, underlying demand here is pretty strong. It's being supported by ongoing geopolitical tensions, which could actually be heating up soon, and the need to rebuild inventory.

So, for him, the bigger risk here is more about timing than any actual disappearance of that underlying demand.

16:09, Chris T

Once we get through election night and know the makeup of Congress, attention is going to shift to what happens next. What should investors be watching most closely, and where do you think the market may be placing too much emphasis on the election itself?

16:21, Richard D

Yeah. So, I mean, as soon as the election is over, you're into this much more pronounced lame-duck phase of Congress. So basically, Congress becomes even less dependent on the president for their own reelection. So, you probably start to see party discipline fade more, which actually we're already starting to see a little bit of, as Trump has become quite unpopular in some regions for Republicans.

But basically, you know, those members of Congress are starting to think about their careers and what happens in 2028. Who's going to be the next president? So, allegiances are kind of starting to shift a bit, which is actually why I think President Trump keeps bringing up this whole sort of third-term thing because I actually think it may help to retain some of that power that he sees slipping away.

"Hey, remember, I could still be here, you know, for a third term."

But, you know, at the end of the day, Chris, I think there's an old saying that elections matter, but the economy matters more.

These elections do matter a little bit more than past ones. But, ultimately, for investors, after the elections we're going to go back to watching inflation, the Fed, and earnings growth.

I think with Trump, the danger for investors is a little bit more on the geopolitical front. So, the president still has an agenda here, a very strong agenda that he's not complacent on, and he has the power to make some changes there.

So, he told us a few weeks ago, you know, he doesn't plan on attacking Iran before the midterms. So, I'll leave that there. We'll see what happens. But that's a post-midterm risk.

18:20, Chris T

Let's finish with a quick rapid fire round. So, we’ll just go right through them.

Most likely election outcome?

18:27, Richard D

A Democratic House. Senate leaning Democrat, as well.

18:30, Chris T

Biggest misconception about divided government?

18:32, Richard D

That gridlock means policy stops. I think the reality is that Trump is still ruling by executive order, and not a ton is going to change there. He's still bypassing Congress for most of the stuff that he wants to do.

18:46, Chris T

Where could the election have the biggest market impact?

18:49, Richard D

The bond market, I'd say net-net, plus is a minus here. But I think on net it'll probably be helpful.

And for the equity market, it's just where we talked about: AI, data centers, infrastructure, energy, defense, and healthcare.

19:01, Chris T

And finally, what's the one thing you want investors to keep in mind as we head into November 3rd?

19:07, Richard D

Yeah. Elections matter. These elections matter a tiny bit more than past midterms. But at the end of the day, it's still the fundamentals of the real economy. And at the moment, that real economy is still doing exceptionally well.

19:20, Chris T

All right.

Richard, thanks as always for the insights.

19:23, Richard D

Pleasure.

19:24, Chris T

Thanks everybody for listening. We'll be back next month with another episode of Monthly Macro. Take care.