The US midterm elections are on November 3. All 435 House seats and 35 Senate seats are on the ballot, along with 36 governors. As of October 8, Republicans held 218 House seats to Democrats' 214. Democrats need a net gain of three seats to take the majority. The New York Times forecast gives Democrats roughly a seven-in-ten chance of winning the House. Polymarket has Democrats in the low-to-mid 80s. Prediction markets and polls are pointing the same direction.

The Senate is different. Republicans hold 53 seats and Democrats need four to flip it. The structural map favours Republicans — they are defending fewer competitive seats. Polymarket has Republicans in the mid-50s for Senate control. The most likely outcome, on current markets, is a divided Congress with Democrats taking the House and Republicans holding the Senate.

That specific outcome hasn't fully been priced by equity markets, and it matters more than the headline volatility around election night.

What a Democratic House means

A Democratic House changes Trump's legislative options immediately. The Iran war, which Trump has been managing largely through executive authority, becomes more complicated. Democrats have been pushing for a War Powers Resolution that would require congressional approval for continued military operations. With the House, they can force a vote. Whether it passes or has any practical effect is another question — but it changes the political calculus.

On trade, the tariff architecture is largely executive order driven and a Democratic House can't repeal it. But it can hold up trade deals that require congressional ratification. The Busan truce extension, now running until January 10, will likely need some form of congressional sign-off on any permanent deal. A hostile House makes that harder.

Fiscal policy is where the split-Congress scenario bites hardest. Trump's tax cuts passed with a unified Congress. Extensions and expansions require the same. A Democratic House will not pass additional tax cuts. The deficit picture changes and long-term Treasury yield pressure potentially increases as a result.

What markets are missing

The equity market has been treating the midterms as a second-order issue behind the Fed and oil. That's understandable given what's been happening in energy markets since February. But a Democratic House changes the risk profile on several specific trades.

Defence stocks rallied on the Iran war. A Democratic House with War Powers pressure on the White House introduces a political ceiling on how long the military engagement continues. That's relevant for names that have priced in multi-year elevated defence spending.

The dollar has benefited from US exceptionalism — higher rates, a government willing to act aggressively in energy markets, a trade policy that's protecting domestic manufacturers. A divided government that can't pass further fiscal stimulus and faces more scrutiny on the war changes some of those inputs.

Goldman Sachs estimates the fiscal impact of a divided government at around 0.3 to 0.5 percentage points of GDP growth relative to unified Republican control. That's meaningful at the margin when the economy is already navigating an energy shock and two Fed hikes in 2026.

Two weeks out, the midterm trade is still underpriced relative to the magnitude of what's at stake. November 4 will feel different to November 2.