With just 10 weeks remaining until the 2026 US midterm elections, financial markets are holding their breath. This is not merely a contest for power in Washington; it is being viewed as a stress test for the direction of capital markets.

Currently, the Democratic Party is performing strongly in polls and could potentially break the Republican and Trump control over Congress in November. According to data from the polling tracking website FiftyPlusOne, Democrats currently lead the generic congressional ballot by approximately 6 percentage points. This suggests that Washington is highly likely to enter an era of a divided government next year.

For investors, this means that major non-consensus legislation will be difficult to pass, and the fundamental functions of the legislative branch risk degenerating into a prolonged political tug-of-war.

In traditional Wall Street logic, markets often favor a divided government because this structure can check the implementation of extreme policies. However, Ed Mills, Managing Director of Washington Policy at Raymond James, has issued a warning.

Market volatility over the past two years has primarily stemmed from executive actions rather than legislation, Mills noted. If Democrats take control of the House, Trump's space to push his agenda through legislation would be greatly compressed. Based on this, Mills predicts the White House may implement its policies through more frequent and aggressive executive orders, particularly tariff actions that have previously triggered sharp market fluctuations.

Although courts have previously placed limits on such executive powers, Trump has been attempting to use different executive authorities to replace the frustrated tariff plans. While JPMorgan has previously pointed out that historical data shows the S&P 500 tends to perform better under a divided Congress than during single-party control, this assumption relies on executive power being exercised within a predictable range.

Beyond policy uncertainty, the most imminent concern for markets is America's ability to borrow. Markets currently expect the US to hit its $41.1 trillion debt ceiling by mid-2027. Looking back at 2025, Republicans passed a massive tax reform and spending plan known as the One Big Beautiful Bill Act and subsequently raised the debt ceiling.

However, TD Securities analyst Molly Brooks believes such smoothness will no longer exist if Democrats win control of Congress. Democrats are highly likely to use the debt ceiling as leverage to demand significant policy concessions from Republicans. Brooks warned that a debt ceiling impasse would directly lead to rising Treasury yields and increased market volatility. As the so-called default trigger date approaches, short-term Treasuries maturing around that time would face enormous selling pressure due to investor doubts about whether principal will be repaid on time.

Another scenario keeping Wall Street up at night is a delayed or contested election result. Due to longer vote-counting cycles in key constituencies such as California, as well as an increasing number of election-related lawsuits in recent years, a clear result may not be produced on election night in November. TD Securities noted in its report that if election chaos occurs, market risk aversion would quickly intensify, with funds potentially flowing out of risk assets like stocks and into safe havens such as government bonds.

Mills emphasized that what investors want most right now is a clear outcome. Wall Street has no incentive whatsoever to relive the election chaos of 2020 or 2024. If the election results are delayed for an extended period, market volatility will remain at elevated levels.