US midterms: Fiscal, market and geopolitical implications of the "blue wave"

Bruce Kasman · J.P. Morgan

Baseline view is that US tariff rates rise somewhat next year despite congressional appetite to roll them back.

Several tariff investigations are ongoing and Congress has an appetite to roll tariffs back, so Kasman is not confident how this will play out. JPMorgan's baseline is still that tariff rates go up somewhat next year.

“Our baseline view, though, is that actually tariff rates do go up somewhat next year.”at 2:12

Derek Chollet · JPMorganChase

Early-2027 legislation likely to curb or eliminate tariffs on Canada, with some Republican support.

When the new Democratic Congress arrives in January, Chollet expects early legislation to be proposed and probably passed. It would have Democratic support and probably some Republican support, aimed at curbing if not eliminating tariffs imposed on countries like Canada. This would be an early geopolitical effect of the midterms on trade.

“I do think early on, there will be legislation that will be proposed and probably passed, certainly with democratic support, but also probably with some republican support to curb, if not eliminate, some of the tariffs that have been imposed against countries like Canada.”at 10:11

Derek Chollet · JPMorganChase

US–Brazil trade turbulence is likely to persist, with both leaders emboldened after the election.

Lula and Trump have not always got along, and there has been rough back-and-forth on trade. Lula has just been reelected and may feel emboldened. Trump is near the end of his time in office and probably looking to do big things abroad to cement his legacy. Brazil is South America's largest economy and a significant US trading partner, so Chollet expects this turbulence to have big implications for the region and globally.

“So I think we have to expect that turbulence will probably remain now that you've got a reelected president in Brazil who feels a little emboldened, given that he just was reelected...”at 25:13

Bruce Kasman · J.P. Morgan

Democratic leverage over budget and debt-ceiling votes will likely roll back planned health-care spending cuts.

The budget for next year builds in significant cutbacks to social benefits, particularly health care. With Democrats in Congress and a budget and debt-ceiling extension to vote on next year, Kasman expects those cutbacks to be rolled back. This was already in JPMorgan's forecast even if Democrats had only taken the House, so it is built into the macro baseline. The main effect is that the full cuts won't happen, which keeps the budget deficit larger than it would otherwise be.

“significant cutbacks in spending on social benefits, particularly health care, that are built into the budget for next year... that what will happen here is that those cutbacks will get rolled back.”at 1:20

Bruce Kasman · J.P. Morgan

Fiscal easing beyond the baseline could widen the deficit and push US interest rates higher in 2027.

An upside risk not in JPMorgan's baseline is that fiscal policy shifts more aggressively toward easing. That could add a little to growth but also put pressure on the budget deficit. Kasman argues that deficit pressure can translate into somewhat higher interest rates in 2027.

“starting to push pressure on the budget deficit, which I think can translate into somewhat higher interest rates in 2027.”at 3:20

Bruce Kasman · J.P. Morgan

Oil prices are expected to step down significantly in the first half of next year as Middle East conflict winds down.

JPMorgan has been assuming that geopolitical conflict winds down next year, which lets oil prices make a significant step down in the first half. The election reinforces that direction on the margin and reduces the risk that oil stays elevated. The oil move is the biggest moving piece so far, but it depends on de-escalation in the Middle East being validated.

“We have been assuming oil prices make a significant step down in the first half of next year.”at 4:32

Bruce Kasman · J.P. Morgan

Pressure to limit data-center build-out reinforces expected slowing of tech spending in 2027.

The election result reinforces growing political pressure toward limits on data-center build-out, which reinforces a case for some slowing in tech spending in 2027. This is already in JPMorgan's forecast. The bigger questions are whether this affects earnings expectations, sector constraints, asset prices and credit access. Kasman downplays state and federal restrictions as a meaningful driver of the tech spending cycle and says Fed policy, credit access and business confidence matter more.

“this is a election result which will reinforce the continuing pressure we're starting to see build towards limitations on data center build out. And that I think reinforces a case that there will be some slowing in tech spending in 2027.”at 5:30

Bruce Kasman · J.P. Morgan

Democratic Senate confirmations will moderate administration pressure on the Fed and expose more Fed turnover next year.

Any Fed nominee now has to pass a Democratic-led Senate. That reduces the payoff of pressuring Lisa Cook and Chair Powell to leave in order to install friendlier board members, since the administration may not be able to confirm them. It also lowers the risk that members hesitant to leave will hold on, so Kasman expects Powell, whose term runs to early 2028, might leave early and one or two other members could leave early. That means more Fed turnover next year than JPMorgan had anticipated.

“So chair Powell, whose term is up in early twenty eight, might leave early. ... We find ourselves with more Fed turnover next year than we had anticipated.”at 6:41

Bruce Kasman · J.P. Morgan

Brazil needs substantial fiscal consolidation, and doubts about Lula's follow-through have led JPMorgan to cut central bank easing.

Brazil's budget has been stretched and there is a very substantial need for fiscal consolidation. It is unclear how well the new Lula administration will move in that direction. Markets have been questioning this and pushed the currency down, so JPMorgan removed some easing it had forecast for the central bank over the next year. Had Bolsonaro won, Brazil's relations with Argentina and the Mercosur agreement would have been reshaped, and that is now off the table.

“the key issue is the budget has been stretched. There's a very substantial need for fiscal consolidation. It's not at all clear how well the new Lula administration is gonna move in that direction.”at 8:17

Derek Chollet · JPMorganChase

Trump is likely to pivot toward active foreign policy as Congress blocks his domestic agenda.

Presidents in the last two years of their second terms have historically pivoted to foreign policy (Reagan, Clinton, Bush 43, Obama). They face an opposition Congress and have little chance of passing a domestic agenda, but more leeway abroad. Chollet expects Trump to be a very active president on foreign policy, while Congress can still shape the agenda through legislation and hearings.

“And as we have seen historically, presidents in the last two years of their second terms tend to pivot to foreign policy. ... I do expect we will see it with the Trump administration”at 10:11

Derek Chollet · JPMorganChase

The incoming Democratic Congress will likely be more hawkish on China than the Trump administration.

The US strategic consensus has shifted firmly hawkish toward China over the last few years, due to concerns about China's economic, political and military power and its efforts to neutralize US advantages in the Indo-Pacific. Trump has been an outlier on China since Liberation Day. Chollet expects the new Congress to bring more hawkish views, probably with some Republican support, so the debate will better reflect where the balance of views is.

“I do expect the Democratic Congress, and this may seem counterintuitive to some, is gonna come in probably a little more hawkish on China than the administration has been thus far.”at 13:04

Derek Chollet · JPMorganChase

Democratic wins in Texas and Kansas open the 2028 map, forcing Democrats to compete in red states.

Democrats flipped Kansas, which had not voted for a Democratic senator since the 1930s, and Texas, which had not since 1988. They won decisively, with a double-digit win in Texas. Democrats who previously didn't spend much time on states like Texas will now spend time and energy on them. This gives more optionality in the 2028 presidential race and favors candidates who can compete in places like Texas, not just the blue wall and the Upper Midwest. The new Democratic members who flipped red districts also have to represent Republican-leaning voters, which Chollet sees as healthy for a polarized system.

“The fact that those flipped and they flipped decisively, not in narrow victories, but in decisive, in one case, double digit victory in Texas... It opens up the political map in 2028.”at 15:04

Derek Chollet · JPMorganChase

A bipartisan Congress will likely push the administration to use Russia sanctions authority and renew Ukraine support from January.

There has been consistent bipartisan support for helping Ukraine and skepticism of Russia. A sanctions bill, the Lindsey Graham Act, passed overwhelmingly before the election and gives the president greater authority to raise economic pressure on Russia, but that authority hasn't been used. If the new Congress arrives in January and nothing has changed, Chollet expects legislation to compel its use. Congress may also try to force Ukraine support. A veto is hard to override, but Ukraine is one issue where he could see enough votes to do it.

“And now you will have solid majorities, democrats plus many republicans, in congress that will be looking for ways to provide support for Ukraine and also raise the costs and the pressure on Russia.”at 18:09

Derek Chollet · JPMorganChase

The Iran conflict will stay unresolved, with recurring military flare-ups for roughly the next two years.

The war is unresolved and Iran can still threaten the Strait of Hormuz, with energy prices still elevated. The administration is looking for a solution, but Chollet doesn't see Iran motivated to give the US a face-saving victory. The war was unpopular before the midterms and has not become more popular since, so Chollet argues the lesson could be to find a deal or a way out. Even if fighting recedes for a while, he expects the situation to remain unresolved with spikes of military back-and-forth for most of the next two years.

“...we're probably in for a future where this situation will not be resolved, and we will see spikes of military back and forth, really for the better part of the next two years, I'm afraid.”at 23:38