Julius Baer Evaluates U.S. Midterms and Potential Economic Policy Shifts
Julius Baer analysts examine the economic impact of the U.S. midterm elections, projecting Democratic control of Congress that could shift policy focus toward redistribution despite presidential veto limits.
David Kohl, chief economist at Julius Baer, has published an analysis on the impact of the U.S. midterm elections on economic policy. According to Kohl, the Democrats are projected to secure a sweeping victory in both the Senate and the House of Representatives, allowing them to control the legislative process in the United States over the next two years.
However, the president's veto power and the extensive use of executive orders already deployed are expected to significantly limit the ability of a Democrat-controlled Congress to reshape U.S. economic policy. "Therefore, we anticipate only limited changes in U.S. economic policy, including taxation and tariffs, where repealing prior legislation or revoking powers previously granted to the president will be necessary," Kohl noted.
Simultaneously, amid high inflation, a declining labor share of national income, and weakening governance, the sweeping Democratic victory could pivot policy away from pro-business measures toward initiatives focused on redistributing income and resources.
Matthew Rachter, head of equity strategy research at Julius Baer, emphasizes that a Democratic victory in both chambers would mark a major shift in Washington's balance of power, as voter frustration over the cost of living and the conflict with Iran translates into a significant setback for President Donald Trump.
In the U.S. stock market, the initial negative reaction reflects fading expectations for further tax cuts and deregulation, alongside the prospect of heightened congressional oversight and more complex negotiations over fiscal policy.
Nevertheless, such a scenario is already partially priced into the market, while Trump's veto power limits the scope for legislative changes that would fundamentally alter short-term earnings forecasts. Consequently, the primary challenge lies in equity valuations.
Sectoral Impact and Market Risks
Uncertainty regarding future tax and regulatory policies may prompt investors to demand a higher risk premium for investing in U.S. equities. Analysts assess that this uncertainty will intensify toward the end of 2027 or early 2028, as the presidential election cycle brings the prospect of broader policy shifts into focus.
Sector risks are distributed unevenly across industries:
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Artificial Intelligence and IT: These sectors face increased scrutiny at a time when state and local restrictions on data center construction could delay investments and defer revenue realization.
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Banks: The banking sector is expected to encounter tighter supervision and a narrower margin for further regulatory relief.
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Healthcare: A distinction must be drawn across segments. Hospitals and health insurers providing subsidized coverage may benefit from efforts to preserve Medicaid and health insurance subsidies. Conversely, pharmaceutical companies face renewed pressure to lower drug prices, while long-term proposals for expanding public insurance could weigh on valuations for insurers and managed care providers. Medical technology remains relatively less exposed to these risks.
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Clean Energy: This sector may include companies that benefit relatively from the political shift, particularly in power grids, batteries, and charging infrastructure. Funding already allocated to these areas may receive broader protection despite ongoing headwinds from high financing costs.
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Oil and Gas: Renewed emphasis on carbon reduction policies creates a less favorable regulatory environment for the sector, although geopolitical developments remain a more immediate driver of corporate earnings.
Currency and Monetary Outlook
As anticipated following a stronger-than-expected Democratic victory, the U.S. dollar weakened moderately. The DXY dollar index declined by approximately 0.4%, indicating that markets largely recognize the limited immediate impact on policy.
The Democratic majority in the Senate remains well short of the two-thirds threshold required to override a presidential veto or convict a president in an impeachment trial. Nonetheless, further modest dollar softening remains possible.
Markets anticipate increased regulatory oversight on artificial intelligence, which could weigh on capital expenditures in the sector and associated capital inflows that served as a key support for the dollar this year. Economists assess that monetary policy and the AI investment cycle remain the dominant near-term drivers supporting the dollar. "Over the longer term, we continue to expect a weakening of the dollar against the backdrop of the persistent U.S. current account deficit and ongoing pressures on its fiscal position," Julius Baer experts emphasize.
