What do the US mid-term elections mean for your investments?

The US mid-term elections on Tuesday 3 November could mark a moment for financial markets. Three key investment themes have marked the runup: AI valuations and spending, inflation and interest rates, and the rising cost of government debt. A shift in congressional power towards the Democrats will likely give more clarity on how these themes play out.

Polymarket, the predictions market, indicates a 93% chance the Democrats take the House of Representatives. The likelihood of Democrats gaining control of the Senate is less clear – the money-weighted bets put it at 65%.

A Democratic-controlled Senate, alongside a Democratic House, would create a stronger constraint on President Trump’s legislative agenda. This suggests more scrutiny of tax policy, trade and tariff measures and corporate regulation.

In fact, political gridlock can help markets. Historically, investors have often welcomed a divided government because it can limit the introduction of major policy changes. The biggest swings in markets over the last couple of years have been Trump’s ‘Liberation Day’ tariff announcements and the attack on Iran a year later.

So what do the US mid-term elections mean for investors in Ireland?

AI stocks: in search of sustainable profit

Artificial intelligence remains one of the biggest drivers of US equity markets over the last four years. And the planned stock market flotation of Anthropic, the developer of Claude, announced today will likely sustain investor interest over the short term.

However, a Democratic-controlled Congress may increase scrutiny of AI companies, particularly around data centre construction, energy and water consumption, competition and regulation.

This doesn’t mean the AI investment story is over. Demand for AI technology will continue to grow, and until now investors have largely sought exposure without demanding a timetable for returns.

But investors are becoming more selective about which companies can turn substantial investment into sustainable profits. And they’re doing so in an environment where cost, including the cost of money, is rising.

With valuations already elevated in parts of the technology sector, even modest changes in expectations could lead to significant market movements.

That could hit software companies at risk of being leapfrogged, over-leveraged businesses which have sought to jump on the AI bandwagon, and potentially in the AI leaders themselves, where valuations remain demanding (and often slip in the aftermath of a flotation, as has happened with SpaceX, down around 7% since its launch in June).

Almost all equity investors have a material exposure to AI, given the proportion of the stock market they now comprise. A tilt towards value stocks, high yield, or European companies could look interesting in this environment. 

Inflation, Iran, and interest costs

There’s a good chance that hostilities in Iran and the wider Middle East increase post the mid-terms. The US administration and the Iranian authorities have said as much - and with Israel at the polls as well, the land could look quite different in a couple of weeks.

With the price of Brent crude oil already nudging $116 a barrel, up 90% on a year ago, that will increase inflationary pressure. That in turn will put pressure on central bankers to raise interest rates – which will have knock-on effects for homeowners, companies which are borrowing – and government bonds, as we’ll see below.

In this environment, energy exposures, as well as consumer staples and foodstuffs look interesting exposures. 

Bonds: watching government spending and interest rates

US government bonds could be particularly sensitive to the election outcome. Right now, yields long-term debt (ie, the return investors demand) are rising, mainly because of long-running concern about the level of US government debt, as well as inflation and rising interest rates. 

The mid-terms will certainly affect US debt plans. A divided Congress could go either way: it could limit the introduction of new spending measures, potentially easing concerns about government borrowing. Or, it could open the taps for government spending if it results in a carve-up, for example giving Democrats a reversal of medical spending cuts, in exchange for the increased military spending many Republicans seek.

And a Democrat-controlled Congress could also bring renewed pressure for higher spending and greater scrutiny of the administration’s economic policies.

Bond markets will ultimately focus on whether these developments affect inflation, economic growth and the path of interest rates.

For Irish investors looking for bonds to do their job of adding stability and a counterweight to equity portfolios, it’ll pay to stay close to home. For global bond funds (and obviously for US bond funds), movements in US Treasury yields can influence returns even when the underlying investments are denominated in Euro.

Some resolution is welcome

The US mid-terms will remove some elements of uncertainty in markets for the next couple of years. It’s also possible to position for likely moves in AI valuations, inflation, and bond movements. Taken alongside the generally positive fourth quarter, and continued corporate earnings growth, there will be opportunities in the months to come.