After the Elections: Economic and Investment Impact

Washington is set to see a significant shift in the balance of power after Democrats won majorities in the House and Senate in the midterm elections. For businesses and investors, the key question now is how the new political landscape will affect growth, inflation, interest rates and the Trump administration’s broader economic agenda, particularly tariffs. 

That was the backdrop for a panel discussion titled “After the Elections: Economic and Investment Impact”, led by Penn Egbert, Head of U.S. Equity Research for BMO Capital Markets. The conversation featured: 

• 

  Katherine Krantz, Portfolio Strategist, BMO Capital Markets 

• 

  Scott Anderson, Chief U.S. Economist and Managing Director, BMO Capital Markets 

Listen to an episode of the Markets Plus podcast based on this discussion:

Here are some of the highlights: 

Although the vote is widely seen as a major rebuke of Republican incumbents over the past two years, Scott Anderson doesn’t see the election as having a major impact on his baseline growth or inflation forecasts for the coming year. 

“Obviously, much of the Republican policy agenda will be stymied over the next two years, but Democrats will have only a limited ability to reverse existing legislation without presidential cooperation,” he explained. 

While the near-term effects may not be pronounced, Anderson does believe the election will create major adjustments in the outlook over time.  

For Katherine Krantz, Democratic control over Congress and Republicans in control of the Oval Office could be seen as a positive by investors. “There’s an old adage on Wall Street that the markets like divided government,” she said. “Gridlock sounds attractive sometimes. But it could be different this time around given the use of executive orders and veto power.” 

Krantz agreed with Anderson that it may take time to understand the full picture of the shift in Washington and what it will mean for investors. While the election outcome will likely affect individual sectors and industries to a certain extent, her focus is more on the Federal Reserve and monetary policy than the party in power. 

“We are still processing the rate cuts that the Fed did in 2024 and 2025,” Krantz said. “It may seem like a long time ago, but we are actually still benefiting from those rate cuts.” 

Typically, it takes about 18 months for monetary policy changes to affect the leading indicators such as equities and another six months to reach the real economy, she explained, which could support revenue and earnings growth through early 2028. That said, higher rates and inflation could start to weigh on multiples, which could affect certain market segments, particularly growth stocks, said Krantz.  

That could affect the S&P 500, she added, given that the index has added many growth and tech names over the past two decades. Krantz, in a recent portfolio strategy report, said she expects S&P 500 EPS to come in at $413 versus the current consensus of $423. Her year-end target for the S&P 500 is 8,050. The key takeaway, however, is that nothing in the current backdrop supports a case for a bear market or a significant rise in the Index. 

The bigger implication for markets will be what higher rates mean for debt and the deficit, and how that could affect tax and spending policies, said Anderson. He said an important date to keep in mind is December 11, when funding for the fiscal year expires. Republicans and Democrats have not previously found much common ground on things like defense spending, the Foreign Intelligence Surveillance Act reauthorization and Affordable Care Act (ACA) cuts, he said. 

The first real challenge for Congress in 2027 will likely come in the first or second quarter of next year, when they will have to raise the debt ceiling. “That’s always contentious and can lead to some temporary government shutdowns,” Anderson said. “This could obviously create some financial market volatility for investors.” 

On policy, the Democrats’ pledge to reverse some ACA, Medicaid and Medicare spending cuts could lift U.S. GDP growth by a quarter percentage point, assuming the President signs it into law, Anderson said. “There is some upside risk on growth and spending, but of course that could add to the federal deficit and debt.” 

Because the Democrats rode to power on promises to address affordability, Krantz said there could be a shift from tax cuts and deregulation. She also thinks greater scrutiny and regulation around AI is possible. 

Another area where the new Congress could focus on is tariffs. “The economy and affordability were the number one concerns for U.S. voters, and tariffs certainly played a role in that,” said Anderson. “I do think Congress will try a lot harder to tame some of the President’s trade and tariff policies, particularly with Canada.” 

However, Anderson cautioned that the President still has significant authority to raise tariffs, including through Section 232. 

Chinese semiconductors, lumber and wood products, drone components, critical minerals and wind turbines are some of the areas where Trump is already looking at potentially raising tariffs. 

“The President certainly could lift tariffs in other areas, and that could actually raise the average effective tariff rate in the United States,” Anderson said. “We estimate maybe as much as two percentage points from where they are today even if we see a little bit of relief with Canada.”