US midterm elections: A clearing event for financial markets

The result of the US midterm elections is now clear: Democrats secured a majority in both chambers. While the outcome was broadly in line with expectations, the initial market reaction was relatively pronounced and larger than anticipated.

A clearing event – not a political revolution

The midterm elections do not fundamentally change economic policy in the US. Trump can veto any legislation Democrats might put forward, and on the big issues – trade policy, geopolitics and presidential decrees – he retains broad powers. Historically, this is good news for equity markets: Periods of political gridlock have typically been positive for the S&P 500.

The tax cuts and depreciation rules that companies have benefited from will not be rolled back. However, Democrats can expect to be in a stronger position when the debt ceiling needs to be negotiated again, likely as early as the first quarter, and concessions on healthcare and social spending may follow.

AI and data centres: Still the central driver

The big theme behind market movements is not the election itself, but concern over regulation of AI and data centres. Democratic candidates successfully made data centres a campaign issue, linking them to high energy and water prices for ordinary Americans. But the market's conclusion is that genuinely tough regulation is unlikely to materialise. The approximately 400 data centres already under construction or with permits will hardly be affected. New projects may face delays, but the AI investment wave is expected to continue.

The bond market sees it differently

While equity markets focus on opportunities, bond markets focus on risks. The stronger AI investments grow, the greater the competition for capital, and the higher the pressure on long-term interest rates. This hits hardest in countries with low growth and high debt, such as France and Italy. Denmark is well positioned with a sound economy and low debt, but is not immune to global interest rate trends.

Our assessment is unchanged

The midterm elections give no reason to revise our forecasts for GDP, inflation or interest rates. We continue to expect a return on global equities of between 5 and 15 percent over the coming 12 months, and remain positive on the AI ecosystem as a growth driver, both in the US and globally. There will be bumps along the way, but the fundamental picture remains constructive.

This article is based on Nordea’s webinar on the US midterm elections with Lead Strategist Josephine Cetti and Chief Analyst Anders Svendsen.