With the US midterm elections approaching, market strategists are weighing possible political outcomes. Michael Hartnett, Chief Strategist at Bank of America, warns that US equities could fall by more than 10% if the Democratic Party secures control of both houses of Congress.
Hartnett argues that such a result would represent a political shift from a populist right-leaning leadership to left-leaning populism. He says this could bring higher taxes and tighter regulation, which would weigh on corporate profit prospects and slow the AI investment boom. Those deteriorating equity outlooks, in his view, could reduce stock valuations by in excess of ten percent.
Current betting markets assign a 64 percent probability to a Democratic sweep of both chambers. According to Polyamrket projections cited in the source, Democrats would hold 234 of 435 seats in the House (a forecast described as having a 91 percent probability of that majority), while the Senate projection shows 52 of 100 seats for Democrats (a 64 percent probability for a Democratic majority).
Hartnett also says that a Democratic sweep could weaken the US dollar and push down US Treasury yields, while international equity markets might benefit. By contrast, a Republican-controlled Senate or a full Republican victory could continue to support AI-related stocks and further gains in US markets; Hartnett notes Donald Trump’s resistance to stricter AI regulation as an example of policies that could favor such an outcome.
He adds that the most favorable scenario for markets might be a Senate that remains out of Democratic control, producing a political stalemate that prevents major economic-policy shifts — a situation the strategist calls beneficial for markets. The probability of that gridlock scenario is said to be just over one-third, while the chance that Republicans retain control of both chambers is currently much lower, around 9 percent.
Hartnett emphasizes that although a greater-than-10 percent equity decline under a Democratic sweep is possible, it is only one of several scenarios and its actual occurrence is uncertain.
State of the bull market
The report also notes that the "magnificent 7" index remains above its breakout level, according to Erstemarket, indicating that several large technology and growth stocks have so far held up despite broader market uncertainty.
(Names and probabilities cited from source: Michael Hartnett, Bank of America; Polyamrket; Erstemarket.)
