The Big Picture Beats Politics

by Jeffrey Schulze of Franklin Templeton, 11/3/26

The Big Picture Beats Politics

Election Day has markets watching how divided Washington will be over the coming two years. A Democratic House is the consensus outcome, and markets increasingly expect Democrats to win the Senate as well. What remains unknown is the size of each potential majority, which will determine whether the next two years bring gridlock and brinkmanship, or a bipartisan spending deal. Regardless of the result, we believe above-trend economic growth, powerful earnings delivery and a historically strong post-midterm window could support a more durable rally for equities in the year ahead.

A Low Bar for House Democrats

History suggests there is a low bar for Democrats to retake the House of Representatives. The president’s party has lost House seats in 18 of the 20 midterms since World War II, and both exceptions came when the president’s approval rating was in the 60% range. Today looks very different than those exceptions, with President Trump’s approval rating sitting in the mid-to-high 30s, Republicans holding only a slim House majority and current polling favoring the Democrats. Prediction markets have largely priced this in with the odds that Republicans lose the House at roughly 90%.

The Senate is a closer contest, but momentum has shifted toward Democrats. Prediction markets now give them roughly a 65% chance of winning control, which would require a net gain of four seats. A Democratic sweep of Congress is no longer an unlikely scenario, which shifts the focus to the margin in each chamber.

Margins Matter More Than the Majority

Speaker Johnson’s tenure has shown how hard it is to run the House with a majority of fewer than five seats, and the Senate has recently offered a similar lesson. With a 50-50 split early in the Biden administration, Senators Joe Manchin and Kyrsten Sinema often held the deciding votes and used them to reshape major Democratic priorities.

When the margin is that thin, a few members can block legislation, extract concessions or stall the legislative agenda entirely. If the midterms leave either chamber with a similarly slim majority, it would likely bring gridlock and brinkmanship over government funding, a higher risk of shutdowns and little new fiscal legislation.

The Case for a Grand Bargain

If Democrats win both chambers with workable margins, a grand bargain between congressional Democrats and the White House could emerge. Democrats could back higher defense spending in exchange for fully restoring social programs. The One Big Beautiful Bill Act included more than US$1 trillion in cuts to Medicaid and SNAP over 10 years, and Democrats want to reverse them.

The lesson from the first Trump administration, when Democrats won the House in the 2018 midterms, could be a useful case study for what lies ahead. The two parties went on to pass the Bipartisan Budget Act of 2019, which raised both defense and nondefense spending caps and led the Congressional Budget Office to raise its 10-year deficit projection by US$1.7 trillion.

A deal is far from certain, however, as both sides would need to sell a compromise to their bases with 2028 in view, and any agreement would likely follow a stretch of grandstanding. A deal, if enacted, could lift nominal growth and benefit defense contractors, Medicaid-exposed health care providers and consumer businesses serving lower-income households. The trade-off is a larger deficit, which could keep upward pressure on long-term yields and strengthen the case for the Fed to move further into restrictive territory.

See more: Why Securitized Assets Deserve a Larger Role in Advisor Portfolios