Top of the Morning: Election Day takeaways - Markets, policy & positioning

Shane Lieberman · UBS

Democratic midterm gains beat UBS expectations, with Jeffries freer from his party's extreme wing.

Lieberman says Democrats won majorities in both chambers, which exceeded UBS expectations, since they had expected a Senate high-water mark of 53 seats. Democrats are on track for about 230 House seats with possibly 20 more, enough to elect Hakeem Jeffries speaker. Jeffries may therefore not need to bend to the extreme views in his party to pass legislation through the House.

“I mean, I think this was above our expectations. We were kinda thinking that the senate high watermark for the Democrats would be 53.”at 2:31

Kurt Reiman · UBS Global Wealth Management

Persistent energy, affordability and tariff concerns make the 2028 outlook very difficult for Republicans.

Reiman argues that if war, energy prices, affordability and tariffs remain the top issues and stay in the headlines for the next couple of years, that explains why Democrats outperformed the polls. Given that backdrop, the political picture for Republicans in 2028 looks very difficult, though the election is still a long way off.

“it just makes it a very difficult still a long way off, but it just makes the picture very difficult for Republicans in 2028.”at 9:15

Kurt Reiman · UBS Global Wealth Management

Lame-duck reconciliation unlikely; debt limit and spending slip to 2027, favouring defense over Medicaid cuts.

Reiman does not see how a lame-duck reconciliation bill covering spending and the debt limit gets done. Some senators who were primaried out may have little incentive to vote. The debt-limit discussion, together with funding and appropriations, therefore moves into next year, and the eventual mix is likely to tilt toward defense with some postponement of Medicaid and other cuts. It is not yet clear whether this gets resolved in 2027 or 2028.

“I just don't see how we get a reconciliation bill that deals with spending and the debt limit... So that pushes debt limit discussions off into next year together with funding and appropriations. That means that the mix is likely to be more defense and some postponement of the Medicaid and other cuts.”at 5:36

Shane Lieberman · UBS

Congress will likely punt many year-end items, including government funding, into a busy Q1 2027.

Government funding expires on December 11, alongside the farm bill, the highway transportation bill and other issues. Senate Republicans will likely push a large package of nominations. Lieberman expects incoming Democrats to ask that many items be deferred, so Q1 2027 will be very busy with government funding, the highway bill and possibly a bipartisan permitting bill.

“On December 11, you have government funding expiring as well as a farm bill and a highway transportation bill, and a number of other issues, that will take priority... I think you'll see a lot of incoming Democrats say, Hey, kick the can down the road because we want to be part of the eventual solution.”at 10:41

Kurt Reiman · UBS Global Wealth Management

Fiscal improvement from planned or legislated measures is unlikely; deficits may stay as large as today.

Because the election produced divided government and a need for compromise, Reiman expects 'forcing mechanisms' to shape outcomes. As a result, whatever fiscal improvement was planned or legislated is unlikely to fully materialise, and deficits could remain as large as they are now. He expects less improvement in the fiscal picture than was hoped.

“there's going to be what I call forcing mechanisms that will ultimately result in the whatever planned or legislated improvement in the fiscal picture is unlikely to materialize in full and we may even have deficits as large as they are now.”at 5:02

Kurt Reiman · UBS Global Wealth Management

Election results won't stop AI data center buildout; terms and pricing may get less favourable for developers.

Reiman advises caution against reading the election as a data-centre moratorium signal, since this was already known and the change is in the terms under which projects get built. AI was in the exit polls but not among the top one to three issues. These are economic development projects that can be made more convincing to local voters. The buildout continues, though it may slow slightly at the margin and developers may face less favourable pricing.

“the idea that there's a large enough data center backlash emerging from the results last night, AI was in the exit polls, but it wasn't number one, two or three of the issues... So the AI build out continues, the terms will change. It might become the pricing may be less favorable to the developers, but we still think it gets done.”at 7:32

Kurt Reiman · UBS Global Wealth Management

Expect more of the same US foreign policy; Trump unlikely to moderate and Congress can't restrain him.

Reiman argues that presidents in their last two years often turn to foreign policy. He expects Trump not to moderate his views after this result. Congress is unlikely to mount a large enough offensive against the executive branch to restrain him, so the foreign policy seen in the first two years should continue.

“I think we have to expect a lot of the same from what we saw in the first two years in the last two years... It's very unlikely that in an outcome like this, that Trump is going to moderate on his opinions.”at 8:13

Shane Lieberman · UBS

Congress is nervous about AI and wants to avoid looking hands-off while keeping US leadership over China.

Lieberman says many members of Congress are nervous about AI and do not want to be seen as uninvolved or too hands-off. They recognise that it is a US versus China contest in which the US needs to lead. The challenge is to support that leadership while adding safeguards for local communities, which he expects to be topical in the coming weeks and months.

“there is a lot of nervousness from members of congress. They don't want to be seen as not, being involved and too hands off.”at 12:11

Kurt Reiman · UBS Global Wealth Management

Rate cuts won't be a straight line; moderating growth and inflation next year lets the Fed step aside.

Reiman expects healthy but moderating economic growth and inflation into next year, which lets the Fed step aside from policy. He sees that as positive for both equities and fixed income. The path to lower rates will not be linear, however, and fiscal deficits and high nominal growth keep yields from falling as far as they might.

“our view is it's not going to be a straight line to lower rates, but that a moderating and economic growth into next year. Still healthy economic activity, but a moderation of growth and inflation allows the Fed to step aside.”at 14:30

Kurt Reiman · UBS Global Wealth Management

Bond yields have higher lows, but safe fixed income still offers attractive yields of roughly 5.5–6.25%.

Next year's nominal GDP growth is still high and deficits are not improving, so bond yields will have higher lows than before. Reiman does not see this as a barrier to bond investing. He points to a safe portfolio that can generate yields above 5.5%, 6% and 6.25%, which he says is rare, so fixed income is still attractive as diversification after strong equity performance.

“That just means that we have higher lows for bond yields. But that's not an impediment to investing in bonds. Far from it. We're talking about a safe portfolio that can generate yields in excess of 5.5%, 6%, 6.25%, that's not something we see very often.”at 15:32

Kurt Reiman · UBS Global Wealth Management

CIO's fixed income focus is primarily on credit, with some preferreds for clients willing to take rate risk.

Reiman describes CIO's fixed income positioning as attractive, with yields of 5.5% to 6.25% available in a safe portfolio. For clients willing to do so, the team takes some interest rate risk through preferreds. Its primary focus, however, is credit.

“we're really primarily focusing our attention on credit.”at 16:31