Market brief
Bank's Midterm Base Case: A Split Congress, Gridlock and Historically Friendly Stocks
The baseline sees Democrats taking the House while Republicans hold the Senate, leaving a modest defense package as the main fiscal output — with brinkmanship and a bipartisan healthcare deal as the risks that could change the math.
Key points
- The bank's baseline is a divided Congress — Democrats in the House, Republicans in the Senate — with little major legislation beyond a modest defense supplemental that carries some Democratic healthcare priorities.
- Because defense money is paid out slowly, the firm does not expect the fiscal package to materially affect growth over the next two years.
- The call could bend either way: appropriations or debt-limit fights and a bipartisan healthcare deal could add spending, while Republicans could push higher defense spending through reconciliation in the lame duck session.
Bank of America's base case for the Nov. 3 U.S. midterm elections has Democrats winning the House while Republicans keep the Senate, a split its strategists expect to produce gridlock rather than sweeping legislation. In that scenario, the main fiscal output would be a modest defense supplemental that folds in some Democratic priorities, such as healthcare spending — and, on the firm's reading of history, a backdrop equities have tended to like.
Even that defense money would arrive slowly. The note points to the slow spend-out of defense funding — the gap between an appropriation being signed and the cash actually reaching contractors, bases and suppliers — as the reason it does not expect the package to materially affect growth over the next two years. A headline defense figure is an authorization to spend over time, not a same-quarter injection into output, so the economic effect lands in installments rather than in one burst.
The firm's market read leans on precedent: stocks have generally thrived when Congress is split, which the note describes as seemingly positive news for equities. That is a historical observation, not a promise. A divided Congress removes the risk of large tax or spending bills, but it also removes the chance of a broad pro-growth package, and the pattern says nothing about the size or timing of any single move.
The bank flags two ways the gridlock script could bend toward more fiscal action. Democrats could use appropriations fights or the debt limit as leverage to extract policy concessions, including additional spending or higher taxes on the wealthy — though the note adds that recent history suggests such episodes rarely produce major policy changes. Separately, Democrats, populist Republicans and the President could find common ground on healthcare, producing more deficit-financed spending.
The clearest difference between a split Congress and a Democratic sweep is control over nominations. Were Democrats to also take the Senate, they could block or reshape appointments to the Federal Reserve and the judiciary, pushing toward more moderate nominees or leaving some seats unfilled — a channel that runs to monetary policy and regulation rather than to the budget line.
In the other direction, the key risk to the gridlock call is Republicans advancing priorities such as higher defense spending through reconciliation during the lame duck session. Reconciliation lets budget-related legislation clear the Senate on a simple majority, sidestepping the 60-vote threshold. Should that happen, the note says, the fiscal outcome and economic outlook would look more like those of a Republican sweep — meaning the spending trajectory, not just which party controls which chamber, is the variable to track.
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