Democrats achieve a landslide victory, global stock markets "plunge before rebounding," gold and silver surge—what is the market trading on?

The Democratic Party achieved a historic sweep in the US midterm elections, not only reclaiming control of both chambers of Congress but also unexpectedly flipping traditional Republican strongholds including Texas, South Carolina, and Kansas. This result has reshaped the market's expectations regarding US fiscal policy, prospects for AI regulation, and interest rate trends, triggering a dramatic repricing of global asset values.

The global market underwent a classic “sell-the-news” reaction. Nasdaq 100 Index futures once fell over 2%, S&P 500 futures dropped more than 1%, and the VIX fear index futures broke above the 20 mark; soon after, the sell-off reversed, US equity futures narrowed their declines, South Korea's KOSPI index flipped from a 4% loss to gains, gold surged past the $4,000 threshold, silver strengthened in tandem, and US Treasuries rallied across the curve.

The core logic behind the reversal lies in Trump's veto power. With the Democratic Party holding both chambers of Congress, its agenda for fiscal expansion and tax cuts is likely to be blocked, reducing federal borrowing pressure and benefiting US Treasuries; yet Trump retains presidential veto power, making the reality that Democrats’ space for legislative maneuvering is also limited, creating an effective policy stalemate and thus relieving market panic. As Stifel's Chief Washington Policy Strategist Brian Gardner previously pointed out in a research report: "The market's instinctive reaction reverses, because investors realize that, in any scenario, policy gridlock is the most likely outcome."

Before the election, prediction platform Kalshi had already priced a roughly 99% probability for the Democratic takeover of the House of Representatives, and nearly 100% for the Senate; the price for a Democratic sweep contract rose to 77%. In its election day morning report, Goldman Sachs pointed out that the outcome of the House had already been priced in, and that surprises were likely to come from the Senate.

However, the aspect that truly surpassed expectations was not the House but the magnitude of the Senate flip and the widespread breakthroughs at the state level.

The Democratic Party won in districts in Texas, South Carolina, Kansas, and Iowa—previously regarded as Republican strongholds. Goldman Sachs political economist Alec Phillips had warned that, historically, Republican candidates in red-leaning states outperformed polls by an average of about 3 percentage points, but this "poll buffer" was not realized this time.

The market's initial reaction was to sell risk assets. S&P 500 futures fell about 0.9%, Nasdaq 100 Index futures dropped 2%, Bloomberg Dollar Spot Index fell 0.4%, the Japanese yen gained 0.5% against the dollar, and the Swiss franc led G10 currencies with a 0.7% rise. Asian equities dropped broadly, with the Nikkei 225 down over 4% at one point, and the KOSPI falling as much as 4%.

As the market digested the implications of the divided power structure, initial panic began to subside. The core point is: Democratic control of Congress can hinder Trump's legislative agenda, but similarly cannot proactively push forward their own policies—Trump's veto creates balanced constraint in both directions.

Invesco Asset Management global market strategist Tomo Kinoshita told Bloomberg that concerns about AI regulation following the Democratic sweep "appear somewhat overblown. Even if the next Congress passes bills tightening AI regulations, President Trump can still exercise veto power."

J.P. Morgan Asset Management Asia-Pacific chief market strategist Tai Hui also noted that Trump still controls key policy tools such as trade, tariffs, foreign policy, and the current regulatory framework. Thus, a divided government has limited impact on his ability to govern. Jesper Koll, senior director at Monex Group, stated bluntly: "This is essentially a strong presidential system that operates through executive orders. Congress may flip, but Trump’s governing style will not change."

This logic helped the KOSPI reverse losses to gains, and led the Nikkei 225 and Taiwan’s TAIEX to significantly narrow their declines, with US stock futures losses further reduced.

A divided government is a clear positive for US Treasuries. The logic is straightforward: Democratic control of Congress limits legislative space for Trump’s deficit-expanding plans, reducing federal borrowing pressure, a clear positive for US Treasuries, currently totaling around $40 trillion.

The US Treasury yield curve fell across the board. Five-year yields dropped by as much as 9 basis points to 4.68%, while 10-year yields fell 7 basis points to 4.89%, before both narrowed slightly.

Wellington Management portfolio manager Brij Khurana told Bloomberg: "A divided government means recent high levels of fiscal spending will be restrained. Historically, such gridlock tends to be quite favorable for Treasuries." Andrew Ticehurst, senior rates strategist at Nomura Securities in Sydney, also noted that the blue wave scenario is "broadly seen as negative for the dollar and positive for Treasuries, and the early Asia session’s moves are consistent with this assessment."

However, Mizuho Bank strategist Evelyne Gomez-Liechti previously cautioned: Don’t chase the narrative that ‘deadlock equals fiscal tightening’ too far—Trump is skilled at negotiating and compromising. It’s possible defense spending rises while promised healthcare cuts are diluted, thus the actual fiscal trajectory could change only moderately.

The technology and AI sectors were the focus of the election-driven selloff. The Democratic sweep triggered concerns about stricter data center construction approvals and progress on AI regulatory legislation, compounded by recent debates over the return on AI infrastructure investment, making Nasdaq the worst performing major index.

Asian tech stocks were clearly impacted. South Korea's Samsung Electronics and SK Hynix each fell around 1%. Longbow Asset Management CEO Jake Dollarhide told Reuters that the Democratic sweep "may put pressure on the tech sector and impose regulatory constraints on AI-related fields, possibly slowing the hyper-growth we’ve come to take for granted."

Saxo’s Chief Investment Strategist Charu Chanana added that deeper Nasdaq futures losses "reflect market concern that the shift in political power will bring more rigorous regulatory scrutiny on AI and the biggest tech companies, at a time when investors are already questioning high valuations and the relentless rise in AI spending."

However, several strategists questioned the degree of market panic. Jesper Koll stated directly that the negative momentum in AI "has nothing to do with whether Republicans keep their majority," and the criticism and concerns surrounding AI "far exceed the political realm." State Street Global Advisors Chief Investment Strategist Michael Arone told Reuters: "I think the real risk for the market is not the blue wave itself, but investors’ overreaction to it."

While the stock market and tech sectors came under pressure, gold and clean energy stocks performed very differently.

Gold prices rose over 2%, pushing back above $4,000. A weaker dollar and lower Treasury yields offered dual support for gold, while the market also bet that a divided government would compress Trump’s fiscal expansion space, alleviating inflation expectations and deficit risks.

The clean energy sector was the biggest structural winner in this election rally.

The market is betting that Democratic control of Congress will block or partially reverse Trump’s series of actions against clean energy projects. South Korea's Hanwha Solutions jumped over 22% intraday, HD Hyundai Energy Solutions and OCI Holdings each rose more than 12%. In the US, Blue Ocean’s alternative trading system showed Enphase Energy and SolarEdge Technologies each gaining around 12%, while First Solar and Sunrun climbed 11% and 8.7%, respectively.

The sharp selloff and subsequent recovery reflect the market’s rational adjustment post-political repricing. The key question raised by Goldman Sachs in its election day morning report—whether the election can serve as a “cathartic event and spur a broader rebuilding of risk appetite”—has been answered at least partially in the short term.

Edward Jones senior strategist Angelo Kourkafas told MarketWatch that, historically, election-driven market volatility tends to be short-lived, and themes like AI and geopolitical dynamics will be the real drivers as we approach year-end.

Natixis Chief US Economist Christopher Hodge also pointed out that the direct economic impact of the election result is “actually not significant”, and it’s more important to watch whether Trump will seek “to change the narrative” with new policy maneuvers after the midterms.

Critical market factors to monitor going forward include: the impact of the US Treasury’s quarterly debt issuance plans on the yield curve, changes in the pace of AI data center construction at the state level, and whether the Trump administration can use executive action under divided government to maintain its core policy agenda.