Deciding Next Week’s Market Trend! The Biggest Uncertainty in the US Midterms: Republicans Unexpectedly Hold the Senate vs. Democrats Win Over 53 Seats

With less than a week until Election Day, the control of the Senate has become the key variable driving the US stock market. Citi believes that expectations of a “blue sweep” have largely been priced in by the market, and the real market risks lie in two tail scenarios: Republicans unexpectedly holding the Senate, or Democrats winning more than 53 seats.

According to a US equity strategy report published by Citi Research on October 30, the probability of Democrats sweeping both chambers of Congress is currently the highest scenario and has been rising recently. This expectation is already largely reflected in the current market valuation of US equities. However, polling results in several key Senate seats remain within the margin of error, and it is not impossible for Republicans to retain control of the Senate.

Citi strategists Scott T Chronert and Patrick Galvin note that if Republicans hold the Senate, US equities could see an additional boost by year-end; conversely, if Democrats win more than 53 seats, the market will begin to preemptively price in the risk of higher corporate tax rates in the 2028 election, putting pressure on equity valuations.

The two scenarios point to completely opposite market directions, making the outcome of the Senate race the core driver for US stocks next week. The relative performance of the financial and healthcare sectors, progress in AI data center construction, and the outlook for the 2027 budget and debt ceiling negotiations will all be repriced depending on the election result.

The probability of Democrats flipping the Senate has continuously increased over the past few months, and as early voting data continues to be released this week, the momentum on prediction markets has shifted further towards the Democrats. Still, Citi emphasizes that this outcome is far from guaranteed.

In terms of seat distribution, excluding swing states, Democrats are currently expected to secure 53 seats, with Republicans at 47. But as many as 16 key Senate seats are listed as closely contested by RealClearPolitics, including nine "true swing" seats. Latest data from the prediction platform Kalshi shows that key seats in Texas (D +72%), Michigan (D +74%), and Ohio (D +70%) are currently leaning Democrat, but the leads are not overwhelming. Seats in Iowa and Nebraska remain narrowly led by Republicans.

Citi points out that if systemic polling errors occur concurrently in multiple swing states, the outcome could swing decisively toward one side, causing the Senate landscape to shift dramatically from “Republicans holding” to “Democrats far outperforming expectations.”

Trump’s approval ratings are a key reference in understanding this context. Citi data shows Trump’s current net approval during this administration is about -21.7%, one of the lowest levels for an incumbent party entering the midterms in the past 20 years. The Democrats lead the generic ballot by around D+8.1, close to the D+7.3 margin in 2018. Citi suggests that the current dynamic most closely resembles the 2006 midterms under George W. Bush, when Democrats gained 31 seats in the House and 6 in the Senate, flipping both chambers.

For the House, Citi essentially assumes it will flip to Democratic control, and this outcome has already been widely anticipated by the market. The Republicans currently only have a slim majority, and it is historically common for the ruling party to lose House seats in the midterms.

Citi believes the outcome for the House will have limited marginal impact on the market, with the key variable being the scale of the Democrats’ victory. If the Democrats only control the House by a narrow margin, members will be compelled to vote strictly along party lines; if the Democrats win a more substantial majority, some members will have greater flexibility to vote according to district interests on key issues, which would marginally increase the chances for Democrats to retain those seats in the 2028 election.

In other words, the greater the House majority for the Democrats in the midterm victory, the higher the probability of a "blue sweep" in 2028, all else being equal.

The Senate situation is much more complex. Citi specifically points out that Senate terms are six years, so the advantage gained in this midterm will directly affect Senate control in 2028. In 2028, most seats up for re-election for the Democrats will be in safe districts. Therefore, if Democrats can win more than 53 seats this time, this will significantly boost their probability of maintaining a Senate majority in 2028 and thus increase the chances of an all-out blue sweep.

• Scenario One: Republicans Hold the Senate

Citi believes that, since the blue sweep is already highly priced in, Republicans unexpectedly holding the Senate would be a positive surprise, triggering a year-end rally in US equities.

At the sector level, Citi's previously recommended “long healthcare/short financials” relative value strategy has largely played out. If Republicans retain the Senate, the financial and banking sectors are expected to see a tactical rebound—because control of Senate committee chairmanships directly affects the direction of financial regulation and holds the power to confirm the next Federal Reserve Chair (Powell’s term is set to expire this year). On healthcare, the House flip alone has already paved the way for increased healthcare spending, but the Senate outcome will determine the scope for budget negotiations.

• Scenario Two: Democrats Win More Than 53 Seats

In this scenario, Citi expects additional pressure on US stocks, both in the short and medium-to-long term.

In the short term, market sentiment will be pressured; in the medium to long term, investors will begin pricing in the risk of higher corporate taxes in the 2028 election in advance—which aligns closely with the Democratic policy agenda for 2024. Citi also notes that the budget and debt ceiling negotiations in 2027 will return to focus: Democrats may push to restore healthcare spending, Republicans favor increasing defense spending, and deficit pressures will rise, although some positive effects from fiscal stimulus could partially offset this.

Citi points out that gubernatorial and local election results could have spillover effects on the progress of AI data center construction, and investors should pay attention.

Prediction markets show that Democrats may achieve wins in several gubernatorial races, including Wisconsin, Ohio, Michigan, and Nevada. Democrat governors generally take a more cautious stance on data center construction approvals and zoning plans, which will, at the margin, increase administrative hurdles to such projects.

Citi highlights Texas as a notable example: although the incumbent governor Abbott (Republican) still maintains a lead in the polls, declining support for Senate candidate Paxton (Republican) raises the possibility of split-ticket voting, making Texas competitive. If Texas ultimately turns Democratic, the impact on AI infrastructure investment logic would be the most representative single-state case.

Citi also emphasizes that these pressures are mostly reflected in an extended supply timeline rather than a cancellation of existing data center construction plans, so the long-term industry fundamentals remain relatively unscathed. Furthermore, concerns over infrastructure financing under a Democrat administration could in fact be alleviated, partially offsetting some negative impacts on funding.

Citi ultimately concludes that the midterm election results are unlikely to have an immediate impact on US equity fundamentals; rather, swings in sentiment and policy expectations are the main transmission mechanisms for the market.

If Republicans hold the Senate, Citi expects a staged rebound, and this scenario cannot yet be ruled out. If Democrats sweep both chambers, it will be a marginal negative in the short term, and the extent will depend closely on what happens in Texas. If Democrats secure over 235 seats in the House and more than 53 in the Senate, the market will have to more seriously consider the risks of corporate tax hikes in 2028 and the possibility of comprehensive Democratic control.