Democratic Midterm Gains Threaten Donald Trump's Fiscal and Defense Agenda

Following the Democratic gains in the U.S. midterm elections, President Donald Trump's ability to expand the federal budget deficit to fund defense priorities while cutting healthcare and food subsidies for low-income families is facing significant hurdles. Trump has implemented tax cuts for households and small businesses, while bolstering U.S. tech firms driving global leadership in artificial intelligence, which requires massive data centers and power plants. His administration also promoted oil drilling in regions like Alaska to reduce energy dependence. The total tax relief under Trump's current term is estimated at $4.5 trillion, including exemptions on tips and overtime, raised ceilings for domestic vehicle purchases, expanded child tax credits, and increased estate tax exemptions up to $30 million.

Simultaneously, Trump has pursued cuts in healthcare subsidies and food stamps. The shift in congressional control could delay or scale back planned reductions over the next decade in federal healthcare spending shared with state governments—such as a $900 billion cut in Medicaid—along with a $200 billion reduction in the Supplemental Nutrition Assistance Program (SNAP). A major focus of Trump's agenda is expanding U.S. military power, including the Navy, following successful operations in Venezuela utilizing artificial intelligence. The proposed defense budget request for the upcoming year could reach $1.5 trillion, up from $919 billion in 2025/2026, aimed at expanding force structure, increasing naval fleet size, and investing in unmanned aerial vehicles and the multi-layered Golden Dome missile defense system.

The immediate consequence of the strengthened Democratic representation is that fiscal expansion will face stricter oversight, slowing the growth of the U.S. national debt, which currently stands at roughly 126% of GDP. This massive debt is largely financed through purchases of U.S. Treasury bonds by foreign nations, including Japan, the United Kingdom, and China. A slowdown in debt issuance will likely reduce the supply of short- and medium-term Treasuries, driving up demand for existing bonds and lowering yields. Falling yields generally redirect global capital into equity markets. Historically, U.S. stock markets have performed strongly following midterm elections as political uncertainty clears, though macroeconomic factors such as central bank interest rates, inflation data, and geopolitical events remain primary drivers of market performance.

The conflict between Iran and the United States is winding down, with energy markets already reflecting this shift through declining oil prices in recent weeks. Lower oil costs are expected to ease inflationary pressures within months, allowing central banks in the U.S., UK, eurozone, and Japan to manage interest rates effectively. This disinflationary trend supports global equity markets and bond yields. Additionally, the shift in Washington's power balance may slightly moderate U.S. trade policies toward Europe, potentially benefiting European markets and stabilizing the euro after years of pressure. Despite these institutional shifts, President Trump retains significant executive authority through presidential decrees, and the Republican and Democratic parties are expected to reach compromises to maintain American economic and military strength.