Washington Watch


‘We suspect that markets would react negatively to a Democratic sweep, as it would represent both a new source of uncertainty and a renewed threat of tax increases’

What if Democrats hold onto the House and Senate?

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Democrats could maintain their grip on the U.S. House and Senate in November’s midterm elections, paving the way for Build Back Better 2.0. 

That scenario is still unlikely, with the odds of Democrats keeping the House hovering around only 26% or 28%, according to estimates from forecasting site FiveThirtyEight and betting market PredictIt .

But it’s possible, so Evercore ISI analyst Tobin Marcus is considering its implications on the markets SPX, +0.66% DJIA, +0.64% .  

What would it mean? Another sweeping reconciliation bill is likely, should Democrats keep their hold on both chambers of Congress, and that would be bad news for the markets, he said.

“We suspect that markets would react negatively to a Democratic sweep, as it would represent both a new source of uncertainty and a renewed threat of tax increases,” wrote Marcus, Evercore’s senior U.S. politics and policy strategist, in a note released Wednesday.

It’s an unlikely hypothetical, as Republicans are favored to win a House majority in November. However, the odds of Democrats retaining control have crept upwards following the Supreme Court’s June decision overturning Roe v. Wade , the landmark 1973 case that established a constitutional right to an abortion.

At the beginning of June, FiveThirtyEight deemed Democrats as having only a 14% chance of controlling the House. Those chances as of Wednesday are up to 26% .

Days before the SCOTUS ruling on abortion, FiveThirtyEight predicted the average number of seats the GOP would hold as 238, compared to Democrats’ 197. Since then, FiveThirtyEight’s forecast shows Democrats gaining ground, causing the average number of seats predicted to be controlled by the GOP to drop by 10.

In the battle for the Senate, Democrats are predicted to maintain their control. 

FiveThirtyEight forecasts since the beginning of September point to Democrats picking up one seat for a 51-49 majority. Evercore’s Marcus notes that if Democrats do keep their hold on the House, then he would expect Democrats to pick up between two and five Senate seats.

This unlikely but increasingly possible scenario would “represent not just an extension of the status quo, but a significant reopening of the legislative window for Democrats to pursue tax and spending proposals, because Senators Manchin and Sinema will likely no longer be the veto points,” the analyst wrote, referring to centrist Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona.

In the event that Democrats manage to maintain or expand control of both chambers, they will likely push for another reconciliation bill — a necessary tactic to circumvent a Republican filibuster with fewer than 60 Democratic senators.

Such a bill could include components that some Democratic lawmakers advocated for in the most recent package, dubbed the Inflation Reduction Act , that were nixed amid negotiations with Manchin and Sinema. 

Should Democrats manage to expand their Senate majority, progressive proposals could see light again in 2023 after being proposed in President Joe Biden’s initial Build Back Better framework but then dropped. That could include a renewal of the enhanced child tax credit, paid family leave and other social programs, according to Marcus, who served as an adviser to Biden when he was vice president.

Regardless of the election outcome, however, some analysts expect markets to follow the trend of rallying after November.

See: U.S. stocks rise 15% on average one year after midterms, analysts find

And read: Betting markets now see Democrats keeping their grip on Senate in midterm elections

Plus: Midterm elections: Republican edge over Democrats erodes in this one key indicator