US midterms explained: what the vote could mean for markets

US voters went to the polls on Tuesday, and markets reacted as the results came in overnight. The Associated Press projected that the Democratic Party will take control of both the House of Representatives and the Senate from the Republicans. Stocks fell sharply at first, then turned higher. The US dollar stayed weaker, and gold climbed back above $4,000.

What are the US midterms?

The midterms take place halfway through a president’s four year term. Americans vote for every seat in the House of Representatives and about a third of the seats in the Senate, which is 35 out of 100 this year. These two chambers make up Congress, which writes US laws and approves government spending.

President Donald Trump stays in office until January 2029, and this vote doesn’t change that. It changes who is expected to control Congress for his last two years. Some votes are still being counted, so the final seat numbers could move. The new Congress starts in January.

Why did stocks fall?

Many investors expected Democrats to do well. Before the results, one analyst said a narrow win “may be largely priced in”, which means markets had already prepared for it. The win now looks bigger than many expected. The Associated Press also projected a Democratic win in the race for governor of Texas, one of the fastest growing US markets for data centres. These are the large buildings full of computers that power artificial intelligence (AI). The winner, Gina Hinojosa, has backed a pause on new data centres until stronger protections are in place.

This matters because AI companies have led the US stock market higher. Some investors fear new rules could make data centres harder to build, and that could slow AI spending. Investors were already worried, as a Goldman Sachs group of AI stocks fell 15% in October and was more than 24% below its peak. The Nasdaq 100, an index of large US tech companies, includes many of these companies, so it fell further than the wider market.

The first moves were sharp, but most of them reversed within hours. Stock futures, which let traders buy and sell US indices when the main market is closed, and Asian stock indices show how quickly the mood changed:

• Nasdaq 100 futures fell as much as 2.4%, then rose to about 1% higher
• S&P 500 futures, which track 500 large US companies, fell as much as 1.4%, then also rose to about 1% higher
• Japan’s Nikkei 225 index fell as much as 4.8%, then closed 1.4% lower
• South Korea’s Kospi index fell about 4%, then closed 0.6% higher

The first drop was sharp, but US stock futures turned higher by the European morning as some investors decided the fall had gone too far.

A strong forecast from chipmaker AMD, published on Tuesday evening, helped ease worries about AI spending. Some analysts also said the end of election uncertainty helped. And any new law on AI would still need President Trump’s signature. European shares also rose, with the STOXX 600, an index of large European companies, up about 1.4%. Banks and clean energy companies were among the biggest gainers.

What can a Democratic Congress do?

A president can veto, or reject, a law passed by Congress. Congress can only overturn a veto with a two thirds vote in both chambers. Before the vote, President Trump said he would probably become “Mr Veto” if Democrats won, and that deals could follow later. This means new laws on tax, spending or AI may struggle to pass without his agreement.

Markets call this gridlock, which means neither side can easily turn its plans into law. Gridlock isn’t always bad for markets. Fewer big spending plans could mean less government borrowing, and some analysts see this as one reason US bond yields fell. Investors also bought bonds as a safer place for their money.

The risk comes when both sides have to agree. Government funding runs out on 11 December unless Congress acts. The US also has a debt ceiling, a legal limit on how much it can borrow. This is expected to become an issue in 2027. Both could lead to political fights. Democrats could also open investigations into the Trump administration, which may bring more news that could move markets.

What could it mean for other markets?

• US dollar: The US Dollar Index, which compares the dollar with six major currencies, fell to a one month low near 101.3. Less government spending and tighter AI rules could slow the US economy, and that could reduce the need for higher interest rates. A bigger conflict with Iran could have the opposite effect, as higher oil prices may support the dollar.
• US government bonds: The yield on the 10 year US government bond, a key interest rate for markets, fell to around 4.9%. A yield is the return investors get for holding a bond. Yields fall when more investors buy bonds.
• Gold (XAU): Gold rose almost 3% and moved back above $4,000 an ounce, trading around $4,050. A weaker dollar and lower yields often help gold, which pays no interest. Gold could still face pressure if talk of a US interest rate rise grows.
• Brent crude: Oil prices seem to be moving more on news about Iran than on the election. Brent, the main global oil price, fell more than 1% to around $102 a barrel, its lowest level in about four weeks. President Trump said there are no immediate plans for more strikes. A senior Iranian official said the two sides are still far from a deal. News on Iran could keep prices moving sharply.
• Bitcoin (BTC): Bitcoin fell from close to $78,000 to around $75,700, then recovered to around $78,400. Some traders worry a Democratic Congress could be tougher on crypto. The CLARITY Act, a bill that would set rules for US crypto markets, failed in a Senate vote in September. One Washington analyst doesn’t expect it to pass in the next two years.

What does history show?

Since 1950, the S&P 500 has been higher one year after every midterm election. The average return over those 12 months was 15.4%. Midterm years themselves have been weaker. Since 1930, they’ve returned 4.7% on average, compared with 9.5% in other years.

The S&P 500 has tended to do better in the year after a midterm election than in the midterm year itself. Past performance doesn’t guarantee future results.

That’s a strong record, but it doesn’t mean the pattern will repeat. There aren’t many midterms to study, and each one happened in different conditions. Today’s include Brent oil above $100, talk of a US interest rate rise and growing doubts about AI spending. These could matter more to markets than who controls Congress. Friday’s US jobs report and next Tuesday’s inflation data are the next big events.

Nasdaq 100: what the chart shows

The daily chart helps explain why the index is under pressure. Price has made lower highs since the record high in October. It’s now below both the 20 day EMA at around 29,260 and the 50 day EMA at around 29,550. An EMA is an average of recent prices. When price trades below a falling average, the short term trend is down.

This week the index also broke below the bottom of the range it had held since May, at around 28,300. It’s now testing that level from below, at 28,433 at the time of writing. A level that used to act as support can turn into resistance. The next few days could show whether buyers can push back above it, or whether sellers hold the line.

The levels we’re watching:

• 28,800 to 29,100: the first resistance zone, with the 20 day EMA just above it. A move back above this area could suggest the drop was a shakeout rather than the start of a bigger decline.
• 27,500 to 27,650: the main support zone, formed at the August low. One possible path is a dip into this area, followed by a bounce back towards resistance. How price behaves at this zone could set the tone for the rest of the month.
• 27,050 to 26,100: if the August low fails, this is the next area to watch. It holds the 50% and 61.8% Fibonacci retracements of the rally from the April low, and the 61.8% level lines up with a support zone from earlier this year.

A Fibonacci retracement measures how much of a previous move has been given back. The 50% and 61.8% levels are areas where a pullback within a larger uptrend often slows or ends. That doesn’t mean price has to stop there, but it’s where many traders may start to look for signs of a bottom.

The Nasdaq 100 has broken below its range from May and is testing that level from below, with support at the August low and the Fibonacci zone beneath it.

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