Blue’s Next: The 2026 Midterm Market Wrap Up

This is Street Signals, a weekly conversation about markets and macro brought to you by State Street Markets. I'm your host, Tim Graph, head of macro strategy for Europe. Each week we talk about the latest insights from our award-winning research, as well as the current thinking from our strategists, traders, business leaders, clients, and other experts from financial markets. If you listen to us and like what you're hearing, please subscribe, leave us a good review. Get in touch, it all helps us to improve what we offer. With that, here's what's on our minds this week. Laziness and time constraints usually preclude us from doing episodes that respond to events in close to real time, but it's also become something of a tradition for us to do reaction pieces to US elections. Also, I've thought for a long time about how to introduce a co-host for Street Sign, not least so we can have these episodes come out more quickly, as well as when I'm traveling or on vacation. So with this week's episode, we're killing two birds with one stone. We usually talk to Noel Dixon for political commentary, and he rejoins us with his thoughts following yesterday's midterm elections. And I'm thrilled to say that I'm also joined by Kayla Saider from our team in the US, as co-host. Regular listeners will have heard Kayla a few times on the podcast, and I'm really grateful that she'll be able to take over the mic for a few episodes every year. Enjoy. Right, well, here we are, Kayla, Noel. Welcome to our midterm wrap-up. First of all, actually, Kayla, I should say, as I said in the introduction, shout out to you for, you know, this is your first co-hosting appearance. So welcome to the show and ad respect. Thank you. I'm excited to be here. Yeah, it's going to be great. It's going to be great. It's going to be a lot more interesting. And I think people will not be put to sleep by my dulcet tones, I think, as much, which is really good. And of course, we welcome our political expert in house Noel Dixon for his usual wrap-up. Noel, welcome back to you. Thank you. Absolutely. So Noel, let's do a quick recap. I was going to ask you what the biggest surprise was, but there seemed to have been so many. So really what stands out to you from those surprises? And particularly, what's the main impact that we should take away from this set of midterm results? Yeah. I mean, the main surprises, of course, were all the ruby-red flips that the Democrats were able to achieve, particularly in the Senate. I mean, I think it began with South Carolina, and then you could start to see the trend move through Texas and Kansas, and that was a clear protest vote. You know, the main topic on, you know, that came across what the exit polls was, you know, the cost of living. People blamed the iron war. They made a direct connection between the iron war and the price of diesel and gas. They connected the tariffs. So in terms of the markets, as we start the day, right now, you know, the dollars weaker, you see Treasury yields have moved a little lower. What is your take in terms of how is the market going to digest this? Does this really change any important topics that have really been driving the market narrative recently? Or is not much going to change? Yeah. No, that's a great question. I think the markets are trading in line with historically, what occurs when you have Congress comprised of Democrats and a Republican president. And if you look since 1971, the S&P tends to increase high single digits, would have pretty high hit rate. You know, the dollar tends to weaken 12 months forward and yields tend to decline. I think what we could be missing, you know, from this equation is that this is probably not your grandfather's Democratic party, you know, and we could get into that a little bit later. But the key thing in the short run will be, of course, what happens with the whole viewpoint on data centers. Because outside of the Senate in the House, there was a major governor races that flipped. Like Texas, Georgia, Ohio, they host some of the highest levels of data centers. So Texas, for example, has 419 data centers, Georgia has 232 Ohio as 113. And the hyperscale is actually view those states as the ripest states to expand data centers moving forward. So what those governors say in the short run in terms of policies surrounding data centers will be critical. So I think that could be a near term risk to account for. We're definitely going to come back to the AI narrative because I think you're right. It's really clearly the biggest impact to portfolios, I think, especially for personal investors over the last few years. It's one where, as you say, in the data center front, there does seem to be bipartisan support for slowing down construction. The referendums, you know, Ohio, my home state, there was something like two dozen referendums, local referendums on data center construction. We're going to come back to that. The case laid out the broad market themes, stocks higher, down low lower yields, as being typical, not just of a Democratic Congress with a Republican president, but any post midterm result. That is the kind of the expected outcome. Which of those would you challenge the most? Is it the equity side of things that is most at risk of being an exception to this midterm process? Yeah. I would actually challenge the rate side. I think the equities, I think, ultimately, as it relates to data centers, I think the conclusion is that, you know, obviously we're in competition globally, mainly, you know, with China, we have to succeed, I think, commercially and probably militarily as well. So I think they'll figure out some sort of solution. But with rates, I think our debt, you know, especially as far as the interest is a percentage of our deficit, is at a point where basically you have within the more progressive leaning Democratic party and now Trump, two people or segments that basically want to expand spending and they want to probably help households. So I don't think we're going to get this grand bargain as it relates to, you know, reducing the deficit, and I think that's going to ultimately translate into, I think, higher term premia for the longer end. So I think we're looking at probably more of a steeper curve versus what we may have gotten in the past. Donald Trump's not a typical Republican and I would say Democrats are, you know, the progressives of not your typical Democrats and they both want to spend. So I think that that could be where I would challenge that. Yeah, you know, I think on the deficit side of things. This is a pretty much an evergreen topic, right? And it's something that we're always thinking about, you know, even today we get the quarterly refunding announcement and there's discussion on will treasury be able to continue supply at the long end? Well, they have to adjust that and, you know, I totally agree with you in terms of term premia, there's a likelihood that that could continue to rise with that said, you know, when you add some context around, do you think term premia will be higher because we have such a wide margin or in the Senate, or do you think this is a different kind of scenario versus, you know, I think heading into this, a lot of people had been expecting a split Congress actually. Can you talk a little bit around how the outcome might be a little different in terms of yields in terms of magnitude? Yeah. So I think most consensus were, even if they had a blue sweep, I don't think they had in their calculus that the Democrats would win by the margin that they won by. So I do think markets are going to have to start to give it a rethink now. This is all speculation. We got a way to hear from members coming into the 120th Congress, however, you know, if you just track to each of these candidates on the campaign trail, you know, they want to pursue things, you know, again, a noble cause like Medicare for all, you know, minimum wage threshold. The thinking before the overnight outcome was that this was more, it'll be more difficult to get that type of outcome if they only had say 51 seats in the Senate. But now we're looking at right now, currently, it's 54. And you know, you have Alaska, Mississippi, I think at least one of those are going to go Democratic. That gets you to 55. So some of these things become a reality. And then not only that, I think this whole pressure to possibly use the nuclear option, the bypass, the filibuster, I think becomes that much more of a risk and it might be that much more appetite to do so in the Senate because of the margin that they won by. How realistic is that that? No, well, I mean, Trump has already said, if they win, nothing's getting past my desk. So as much as the majority is larger than we expected, it's not veto proof. And so how much can we really expect fiscal policy to move the dial with that being reality? Trump is certainly going to exercise that veto pen, you know, his hand is going to be worn out from using it so much. But I think what markets tend to do is they tend to project onto the presidential election. They'll take the temperature of where the Democrats are, where's their general policy again, which speculating we got a way to see what that is. But my sense is that they're going to want to, you know, pursue some real robust spending policies and then. They're going to be willing to override the filibuster and then I think the markets take away will be well because of the margin of victory they had. It's likely they may win the presidency and they'll have the formula that they need to pass these more aggressive spending agenda items. So I think maybe let's dive back into AI a little bit. You've talked a little bit in terms of the role governors play. But what about in Congress, what do you expect in terms of regulations around AI and what should we be looking for in terms of policy that might be coming out on the AI front? I think that Congress is actually limited in what they could do from a federal level as it relates to AI. They could put guardrails for things like super intelligence, they could pass some general federal regulation uniformly basically saying data centers have to meet some environmental requirement or something like that. But outside of that it really boils down to the states. They're the ones who will have to work with the hyperscalers or vice versa to come to some sort of compromise or agreement on how they want to move forward. So from a federal level, if anything, I think that could be actually constructive if they put some guardrails, but outside of that, I think it's going to boil down to the state level. It's interesting to me in that this is up for debate. As Kayla said, in question, the regulatory elements are very much going to be in flux. I think the concept of spending is going to be in flux dependent on how companies read the government response to it. And that gives rise to something that we've been thinking about at various points this year and is very much in front of mind right now, which is rotation away from AI. Last month, I looked yesterday, consumer staples outperformed IT within the S&P 500 by 24% last month, just in one month. And so I have kind of a twofold question, are there sectors we should start to think a little bit more favorably about in respect of what the new government composition looks like? That's part one. Part two is actually something that someone raised that I read earlier this morning is, where markets actually anticipating this in maybe already getting an early jump on rotating away from AI with these results maybe expected, or at least as Kayla mentioned, one house was kind of a given. Whether they were anticipating it, I mean, I think if you just look at betting markets, polling, sentiment indicators, I mean, most had maybe a slight edge in the center for the Democrats and the House, you know, obviously largely going to the Democrats. So you could argue there was a little bit of rotation historically under democratic regimes actually tech performs pretty well, followed by consumer discretionary and financials. So those those have been the best performers in recent years. I would say since 2020, you've also had outperformance with clean energy and healthcare stocks as well. So I think that is where to your rotation question, I think I think tech is still the, you know, the best, you know, from our earnings perspective. But there's definitely going to be new competition. I would say at least with healthcare and I would even argue with clean energy for investors to look at. And maybe let's take the flip side of that then. So you see tech still doing well. You see some potential in healthcare, clean energy, but are there any sectors or, you know, parts of the market that should underperform given the results? Energy potentially could underperform because key, the two key items that was spoken about all night through all the, with all the Democratic candidates was basically ending the iron war and then also reducing tariffs. So ending the iron war course will, you know, cause energy prices to, I think decline. I think the incentive for energy companies to want to produce more, I think will decline. So they'll probably focus more on self-preservation and enshrining their balance sheets as opposed to, you know, their profit margins will definitely probably shrink. So I think energy is in jeopardy. I do think financials could be in jeopardy because of, it's likely that Elizabeth Warren is going to be the chair of the banking committee. They'll have some protection in the next two years because of Trump, you know, obviously, he'll control the regulatory landscape. But again, markets are going to start to look forward and say, you know, this is going to be an issue for 2028. So I think that could be problematic. So those are the two areas bucking the trend with history because financials typically have done well with Democrats, but I think this time could be, cause again, this is not your grandfather's Democratic party. I think it could be a little bit different. So 2028, great place to finish on. We of course have danced around the president a little bit. We've talked about the influence on this election and him being on the ballot or being imagined to be on the ballot. But let's think about the intervening two years and particularly questions of where he is a lame doc versus where he can actually still project executive power, both domestically and abroad, you know, and let's use the Iran conflict as a starting point because you brought up the notion of potential energy under performance, potential financial regulation that's coming in. The second term president's particular in the last couple of years of their presidencies tend to focus on foreign policy. So how do you see his approach changing or staying the same in respect of these results? Again, he says he wants to work with Democrats, but he said the same thing in 2018 and we kind of see how that turned out historically, presidents pivot to foreign policy. So I think from a legacy standpoint, cause the establishment Republicans were actually on the right of Trump as it relates to Iran. They actually wanted him to finish the job. I would argue Trump is more transactional in nature. So if there is a path for him to compromise with the Democrats where, you know, he gets some level of, they agree on some level of funding to basically close out the war and they could get to some sort of agreement with Iran. I think he's going to take that in a heartbeat because I think at this stage, he's basically thinking about legacy and then the Democrats obviously want to perform the best they can to increase their chances for, you know, 2028. What Ukraine, I think, will be very interesting. Any legislation the Democrats try to bring forward to support Ukraine, I think, is going to get vetoed. And I'm not sure he'll reintroduce the sanctions that basically all of the Senate agreed upon. So I think it'll be more or the same as the rules to Ukraine. I think tariffs, this is where I think you could get some tension. I think he's going to, you know, that's one of his key levers. I think he's going to unilaterally try to optimize his, his tariff authority. And I think it could frustrate, you know, obviously the majority of Democrats in the Senate and some moderate Republicans to the point where you are able to get the 290 in the House in the 67 in the Senate to actually take that authority back from the president. From a regulation standpoint, I would expect of basically deregulation, monsoon to come down the pike. He's going to try to deregulate as much things as he possibly can before, you know, before the Dems come in 2028. So there's a lot there, maybe one place to wrap up then is, you know, how does this set up the landscape for 2028 in terms of both successors for Trump and who might end up being the Republican nominee and the kind of the characteristics that might develop there. But then also on the Democrat side, because as you've mentioned, this isn't your, your grandfather's Democrat party. How are you thinking in terms of how does this shape, who might be running in the 2028 presidential election? So from the Republican side, I think you're going to get a pivot away from the MAGA kind of movement with Republicans. I think an interesting statistic is obviously Trump's approval rating going into last night was very low. A lower than that was actually in 2022 and the Democrats actually outperformed in the midterms because every candidate that Trump picked essentially lost, you know, if you look at last night, that seems to, it looks like history wronged in that regard. So I expect that the Republicans are going to be, they're basically going to blame Trump and they're going to want to pivot away to something more, you know, traditional sort of conservative movement. So I think that favors more so a Marco Rubio over, say, a JD Vance. On the Democratic side, I think it's going to be interesting because the DNC set up the primaries where it starts in very conservative state. So it starts in South Carolina, for example, and moves throughout the South initially. So they, they designed it that way because they obviously anticipated this, this movement from the left, they would like to basically counter that and, and, you know, basically have more of a centrist candidate that they think could go up against, say, a Marco Rubio who would be very formidable in 2028. The issue with that. That, of course, as we learned last night is, regardless of how you set it up, if you have this movement, then it's kind of hard to fight that. But I think the takeaway from last night, if you look at the exit polling, was that it wasn't because they love Democrats. It's because they were very angry about the economic conditions. Two years is a very long time, but I would argue if the Democrats actually outperform in the next two years, things are looking good. Then I think that actually increases the prospects for a more progressive candidate. If it's kind of modeling along and things don't improve dramatically, then you're looking more at a more centrist candidate, like a Andy Bashir from Kentucky, for example. There's so many open questions, no, well, whether it's on the politics of it or on the markets of it. The one question I definitely want you to answer is when you're going to bed, and I hope the answer to that is very early tonight because you need your sleep. As always, appreciate you taking the time to do this on such short notice. So thank you to you. And thanks to Caleb. It's great to not be the only one asking questions, Caleb. It's really not. I am so happy to be here. Thanks so much, Tim. Excellent. Thanks, everybody. Cheers. Thanks for listening to Street Signals. Clients can find this podcast and all of our research at our web board insights. There, you'll be able to find all of our latest thinking on markets where we leverage our deep experience in research on investor behavior, inflation, media sentiment, and risk, all of which goes into building an award-winning strategy product. And again, if you like what you've heard, please subscribe wherever you get your podcasts and leave us a review. We'll see you next time. It does not consider any recipients, particular investment objectives, strategies, investment horizon, or tax status, and is not intended to replace the exercise of an investor's own independent review and judgment regarding any investment position. Views and opinions expressed herein are as of the date specified, are subject to check without notice, and may not necessarily reflect the institutional views of State Street or its affiliates. Information is obtained from sources of lead to be reliable at the time of publication. The State Street makes no representations or assurances that the information is complete or accurate. And you should not place any relies on said information. State Street hereby disclaims any warranty and all liability by the arising in contract or otherwise, for any losses, liabilities, damages, expenses, costs, either direct, indirect, consequential, special or punitive arising from or in connection with any use of this communication and/or the information you're in. The State Street or its affiliates may have positions in trade or have commercial relationships and all the instruments or issuers discussed herein. This communication may contain information due to be forward looking statements and may not be redistributed without prior written consent to State Street, past performances no guarantee of future results.