US Midterm Election Countdown: Blue Wave or Red Wave? A Complete Analysis of US Stocks, Treasuries, the Dollar, and Bitcoin

The US midterm elections are entering their final countdown, and markets are closely assessing the potential ripple effects of a shift in control of Congress. Historical experience suggests that US equities tend to perform strongly after midterm election results are announced. However, this election is taking place against a more complex macro backdrop: the artificial intelligence (AI) investment boom, concerns over fiscal deficits, the interest-rate outlook, and geopolitical risks could all amplify the impact of different election outcomes on US equities, Treasuries, and the US dollar.

If Democrats secure a decisive victory and create a “blue wave,” markets may reassess AI regulation, data-center construction, and the valuations of major technology companies. If Republicans retain or expand control of Congress, trades centered on fiscal expansion, inflation, and rising yields could regain momentum. The following analysis examines potential moves across major assets through the lens of election forecasts, historical patterns, and different political scenarios.

Election Forecasts: Markets Currently Lean Toward a “Blue Wave”

Based on trading prices on prediction markets such as Polymarket and Kalshi, the implied probability of Democrats taking control of the House of Representatives is around 90%, while their chances of winning control of the Senate are above 60%. In gubernatorial elections, Polymarket places the probability of Democrats holding more governorships after the election at around 77%. Kalshi pricing suggests that, after the election, 28 of the 50 governors could be Democrats, compared with 22 Republicans.

This indicates that markets have already priced in, to some extent, a relatively strong Democratic showing. Therefore, the key issue is not merely who wins, but how the final outcome differs from current market expectations:

• Democrats sweep both chambers: This could strengthen expectations for tighter regulation, increased public spending, and policy changes.

• A divided Congress: Legislative efficiency may decline, but markets generally favor greater policy predictability.

• Republicans retain both chambers or a red wave emerges: If the outcome is materially stronger than expected, bonds, the US dollar, and growth-stock valuations could all face significant repricing.

Bloomberg’s Markets Pulse survey also highlights market divergence. More than half of respondents believe that a Democratic sweep of both chambers would be the election outcome most likely to push US Treasuries higher. In equities, more than 60% believe the SP 500 could rise over the next 12 months if Republicans retain both chambers. By contrast, 58% expect the SP 500 to decline over the same period if Democrats gain full control of Congress.

US Equities: Historically Bullish, but AI Regulation Could Be This Election’s Key Variable

Historical data shows that US equities have generally performed well following midterm elections. Bloomberg statistics indicate that, since 1950, the SP 500 has generated a positive return in the 12 months following every midterm election, with an average gain of around 15%.

In the near term, the fourth quarter of a midterm election year has also tended to favor equities. J.P. Morgan Asset Management notes that US stocks have delivered an average return of 6.6% in the fourth quarter of midterm election years since 1950. The rationale is that political uncertainty declines after the election, allowing investors to refocus on corporate earnings, economic growth, and monetary policy.

However, the key difference in the current market cycle is the dominant role of the AI theme. So far this year, the SP 500 has risen by more than 12%, while the Nasdaq 100 has gained nearly 16%. Mega-cap technology companies, semiconductors, cloud services, and data-center-related stocks have been among the major drivers.

Scenario 1: A Democratic Sweep Could Pressure Technology Stocks

If Democrats gain control of both chambers, markets may raise expectations for AI regulation, antitrust investigations, data privacy rules, and restrictions on energy consumption. Regulatory uncertainty may affect not only software and AI model developers, but also the broader ecosystem of data centers, power suppliers, chipmakers, and cloud infrastructure providers.

Tatiana Darie, a macro strategist at Bloomberg Markets Live, has noted that a “blue wave” could hinder data-center construction, which is a key pillar of the AI boom. Greater Democratic influence could lead to tighter project approvals, power regulation, and environmental reviews, increasing uncertainty around capital expenditure by large technology firms.

As a result, a decisive Democratic victory could lead to:

• Valuation corrections in AI, semiconductor, and major technology stocks;

• Relative support for defensive sectors, utilities, and high-dividend segments;

• Greater volatility in the Nasdaq 100 and SP 500;

• More pronounced profit-taking pressure in AI-related stocks that have already rallied sharply.

Scenario 2: Republican Control Could Support Risk Assets

If Republicans retain both chambers, markets may interpret the outcome as signaling less pressure for AI regulation and fewer restrictions on corporate investment and energy development. Risk appetite toward technology and growth stocks could therefore remain supported.

That said, this does not necessarily mean equities will rise across the board. Markets would also need to assess whether higher yields could compress technology-sector valuations. In other words, a Republican victory could be positive for corporate and AI investment expectations, but if fiscal expansion pushes long-term Treasury yields higher, long-duration growth stocks could still face pressure.

Scenario 3: A Divided Congress Has Historically Been Relatively Equity-Friendly

Scotiabank Wealth Management’s analysis of data since 1970 shows that when the two chambers are controlled by different parties, the SP 500 has posted an average cumulative gain of 33.8% in the two years following the election. This outperformed the 28.8% average gain when Republicans controlled both chambers and the 22.7% gain when Democrats controlled Congress.

Markets generally view divided government as an environment with a lower probability of dramatic policy shifts. Large-scale fiscal stimulus, tax increases, or stringent regulatory measures are harder to pass quickly, helping reduce corporate concerns about policy risk.

US Treasuries: Fiscal Deficits and Yields Will Be at the Center of Trading

The Treasury market may be no less sensitive to this election than the equity market. The key reason is that US fiscal deficits, Treasury supply, and inflation expectations have become important drivers of long-term yields.

Republicans Retain Both Chambers: Treasuries Could Face Selling Pressure

Barclays strategists believe that if Republicans unexpectedly retain both chambers, US Treasuries across maturities could face further selling pressure. The market logic is that Republican control of Congress could increase expectations for fiscal expansion, stronger economic growth, and higher inflation, while intensifying concerns about widening deficits.

In such a scenario, investors may demand a higher term premium, with longer-dated Treasuries particularly vulnerable:

• 10-year and 30-year Treasury yields could rise;

• Long-dated Treasury prices could decline;

• The yield curve could steepen;

• Rate-sensitive equities and high-valuation technology stocks could come under simultaneous pressure.

A Democratic Sweep or Divided Congress: Treasuries May Find Support

Wells Fargo Securities strategists believe investors could watch for the potential for Treasury gains ahead of the election. Their reasoning is that the two most likely outcomes—a Democratic sweep of both chambers, or Democratic control of the House with Republican control of the Senate—could both bring some degree of expected fiscal restraint.

If Democrats gain full control of Congress, heightened AI regulatory concerns could pressure technology stocks and drive safe-haven flows into Treasuries. If government is divided, markets may conclude that major deficit-expansion proposals are less likely to pass, further supporting Treasuries.

Historically, the yield curve has also tended to flatten after midterm elections. Bloomberg MLIV strategists examined eight midterm elections since 1994 and found that in six cases, the 2-year/10-year Treasury yield curve flattened further within two weeks after the election. This may imply expectations that long-term rates will fall faster than short-term rates, or that long-term risk premiums will narrow as policy uncertainty declines.

US Dollar: Election Results Could Amplify Policy and Safe-Haven Trades

The direction of the US dollar will depend on three primary factors: Treasury yields, risk sentiment, and market expectations for fiscal and regulatory policy.

Blue-Wave Scenario: The Dollar May Weaken, but the Downside Could Be Limited

Goldman Sachs believes that if Democrats sweep Congress, markets may focus on tighter regulatory scrutiny, a slower pace of AI infrastructure buildout, and lower technology-stock valuations. In this environment, long-duration Treasuries could rise and yields could decline, creating downward pressure on the US dollar.

However, Goldman also argues that the dollar’s downside may be limited. Markets may not fully and persistently price in regulatory changes before relevant policies are formally enacted. In addition, if investors believe unified government could eventually lead to greater fiscal spending, that expectation may partly offset dollar weakness.

Red-Wave Scenario: The Dollar May Have Greater Upside Potential

If Republicans continue to control Congress, markets may bet on relatively looser AI regulation, a more supportive environment for corporate investment, and yields remaining elevated. Higher Treasury yields typically support capital inflows into the dollar, providing a tailwind.

OCBC’s view is relatively neutral: Democratic control of both chambers may have a limited impact on the dollar, while greater reliance by the White House on tariffs and sanctions could strengthen the dollar against certain currencies. A divided Congress may be broadly neutral for the dollar, while a Republican sweep would be relatively bullish.

In addition, an escalation in Middle East tensions or other geopolitical risks could increase safe-haven demand for the dollar. Even if US equities and Treasuries respond differently to election results, the dollar could still find support from defensive buying.

Potential Spillover Effects on Greater China Assets

Post-election volatility in US markets could also be transmitted to Greater China markets through three main channels: technology stocks, Treasury yields, and the US dollar.

1. Technology valuation linkages

If US AI and semiconductor stocks experience a regulation-driven valuation correction, Asian technology supply chains, chip designers, server manufacturers, and cloud-related assets could also face pressure.

2. The US dollar and capital flows

A stronger dollar typically increases capital outflow pressure on emerging markets. Conversely, a weaker dollar may help improve sentiment toward Asian risk assets.

3. Treasury yields’ impact on Hong Kong equities and growth stocks

If long-term Treasury yields rise, discount-rate pressure on high-valuation growth stocks increases. Hong Kong-listed technology companies and Asian growth assets may be affected.

4. Risk aversion and gold demand

If political or geopolitical risks rise after the election, gold, the US dollar, and certain defensive assets may attract simultaneous attention.

Conclusion: The Key Is Not Only the Result, but the “Expectation Gap”

Historical experience suggests that US equities tend to perform well after midterm elections. However, markets have already accumulated substantial gains in this cycle, and the AI boom has made technology stocks more sensitive to regulatory and interest-rate changes. Investors should therefore avoid forming a single directional view based solely on a “blue wave” or “red wave.” Instead, they should focus on the gap between the final result and existing market expectations.

Put simply, the first wave of post-election volatility may come from an adjustment in expectations. But medium-term trends will still depend on fundamentals including inflation, Federal Reserve policy, corporate earnings, fiscal supply, and geopolitical developments.

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