USA, midterm elections: inflation hits twice

History repeats itself, but with reversed roles. In 2024, Kamala Harris and the Democrats had lost the White House with inflation and the cost of living at the center of voters' concerns. Two years later, Donald Trump and the Republicans lose control of Congress for the same reasons: inflation and the cost of living. Much of the discontent remained unchanged. The result will force Trump to face the last two years of his mandate with both chambers, the House of Representatives and the Senate, with Democratic majorities.

For stock markets, a politically weakened presidency is not necessarily bad news. Historically, stock markets have performed well in the presence of a divided government. Furthermore, the prospect of a bipartisan agreement on the budget could generate a positive fiscal impulse, through a compromise that includes greater military spending and measures to avoid a drastic reduction in social and health benefits, which would risk progressively leaving millions of Americans without health coverage. A scenario similar to that of the Bipartisan Budget Act of 2019.

This is less good news for the bond market, as political conflict and fiscal discipline rarely go hand in hand, and neither side has a political interest in supporting austerity measures. On the contrary, both have an interest in advancing their respective spending priorities. As a result, high deficits and large Treasury issuances continue to pose a significant risk, especially for longer maturities.

The dollar also appears vulnerable, in light of the large fiscal imbalances, the lower credibility of economic policies and the uncertainty about the future direction of the FED.

As regards the sectoral implications, the companies most exposed to the internal market and most sensitive to changes in taxation are those that risk being most affected by the new scenario. A Democratic-majority Congress could put a corporate tax increase back on the political agenda. Companies that earn the majority of their profits domestically have limited exposure to foreign revenues and can count on few structural tax breaks are the most vulnerable. This is the case, in particular, of US banks, retailers active in the US market, companies operating in the managed healthcare sector and telecommunications operators.

For data centers, a scenario characterized by a Congress with a Democratic majority and a politically weakened Trump has implications that are more nuanced than overtly negative. Opposition to the construction of new data centers is now a reality, but both Democrats and Republicans have an interest in preserving the economic growth and tax revenues generated by this sector.

In contrast, power grid infrastructure, electrification, and industrial investment in the United States could once again benefit from greater policy support. The infrastructure sector is particularly interesting because it represents a field of convergence between the two sides: the Democrats support the energy transition and investments in electricity grids, while the Republicans continue to promote national manufacturing, energy production and reshoring.

*Member of the Carmignac investment committee*