The runup to the 3 November US midterm elections will focus attention primarily on the implications for US public policy and assets. Our base case is that the Republican Party will lose control of the House of Representatives while narrowly retaining its Senate majority, leaving President Trump to govern with a divided Congress for the remainder of his term. The next most likely outcome is that the Democrats take both chambers, while we assign only a 10% probability to the Republicans retaining unified control. A split Congress would make major domestic legislation more difficult, although the president’s use of executive authority and latitude over foreign affairs means policymaking would not come to a halt, in our view.
But the implications will extend beyond the US. European investors will be alert to the effects on trade policy, defense spending, and global bond yields.
A renewed tariff confrontation between the US and Europe looks unlikely after the midterms, and we expect a greater focus on trade relations with China and EU efforts to promote domestic activity. The July 2026 EU-US trade agreement caps US tariffs on EU imports at 15%, providing greater policy certainty in one of Europe’s most important export markets. Instead of revisiting this issue, we expect Washington to place greater emphasis on pressing allies, particularly the EU, to adopt a tougher stance toward China, whether through coordination or economic pressure. As concerns about Chinese competition intensify, particularly in strategic industries, European policymakers are becoming more willing to consider industrial policies aimed at strengthening domestic production and reducing external dependencies. The Industrial Accelerator Act (IAA), proposed by the European Commission in March 2026, provides an indication of the direction of travel. The legislation seeks to increase the share of value-added activity that occurs within the European Union, potentially covering not only manufacturing but also research and development, supply chains, and critical components.
Europe’s commitment to rearm and move toward the revised NATO spending targets is firm, and we do not expect the outcome of the US midterm elections to materially alter this. Recent conflicts have demonstrated the need to rebuild military inventories and expand capabilities in areas such as air defense, cybersecurity, and AI-enabled systems. Delivering that expansion will require more than additional orders for defense contractors, because Europe also needs production capacity, digital infrastructure, and more resilient supply chains. Capacity constraints and procurement bottlenecks may affect the pace at which companies benefit from the increase in demand. We therefore see opportunities among direct defense beneficiaries and select companies enabling the modernization of Europe’s industrial base.
A divided Congress should not automatically be interpreted as fiscal discipline, and large US deficits have the potential to place upward pressure on European yields. The US has been running unusually large fiscal deficits despite an economy operating close to full employment, and the fiscal outlook is expected to deteriorate further in the coming years. Investors may continue to demand greater compensation for holding longer-dated US government debt. . A sustained rise in Treasury yields would likely impact European yields just as defense and infrastructure commitments increase the region’s own financing needs. Companies with strong balance sheets and reliable cash generation should be better positioned to absorb structurally higher financing costs. Within fixed income, we continue to see select opportunities in European investment grade and BB rated corporate bonds, supported by healthy fundamentals and relatively conservative balance sheets.
So, we remain positive on select opportunities in European equities created by the expansion of the region’s industrial and security capacity. We favor companies capable of benefiting from reshoring and industrial modernization, particularly where financial strength supports their ability to translate structural demand into sustained earnings. Diversification and select European corporate bonds can add resilience, allowing investors to manage political and financing risks while retaining exposure to Europe’s structural investment cycle.
This article is based on research by Dean Turner, Maelle Quillevere, Rolf Ganter, Alexander Stiehler, Rochus Baumgartner, Matthew Gilman, Thomas Parmentier, Frederick Mellors, Achille Monnet, and Thomas Wacker. For more details, please read our latest “US midterms: What matters for Europe?” update, published on 9 September 2026.
