While some market strategists are bracing for political gridlock and falling yields, others warn of an unpredictable president, Donald Trump, who could use his remaining instruments of power all the more decisively. For Swiss companies, the tariff risk remains particularly relevant.

The new balance of power in Washington is likely to significantly slow Trump’s political agenda. Additional tax cuts, large-scale spending programs, and further deregulation will be harder to push through. However, the president still has broad executive powers. The question, therefore, is how he will react to his limited room for maneuver.

The markets remain calm - for now

Mike Bell, Head of Market Strategy at RBC BlueBay Asset Management, compares the political development to a tornado. "Toto, I have a feeling we’re not in Kansas anymore," he comments, alluding to the film classic "The Wizard of Oz." Kansas elected a Democratic senator for the first time since 1939.

The political implications could be significant. For the financial markets, however, Bell initially expects little change. "The president can block any Democratic policy with his veto, and the Democrats do not have enough seats to initiate impeachment proceedings," he explains. Bell sees the larger market risk in a possible escalation in the Middle East. Rising energy prices could then weigh on both stocks and bonds.

UBS also expects more political friction than a fundamental economic policy shift. The election result is a setback for Trump and the Republicans, but it does not amount to a broad political mandate for the Democrats.

Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, expects above all short-term volatility in technology and regulation-sensitive sectors. "However, we do not believe that the outcome materially changes the medium-term fundamental outlook and therefore justifies an immediate strategic adjustment of portfolios," he explains. UBS sees the debt-ceiling negotiations as the clearest risk for the bond market.

Lombard Odier sees opportunities for equities

Michael Strobaek, Global CIO at Lombard Odier, takes a much more optimistic view of the consequences of the new political configuration. "Overall, this result is positive for the markets. We welcome the additional clarity, and market risk has now declined," he says.

A divided government in Washington is often a favorable environment for equities because checks and balances can limit extreme political moves. Strobaek also expects long-term bond yields to fall. "The trend in long-term yields is downward, and that is good news for investors," he says.

He also sees further upside for the stock market. Corporate earnings provide a solid foundation. The development of artificial intelligence (AI) is also not fundamentally called into question by the election result. "You cannot simply think AI away. It is an integral part of the U.S. economic development," Strobaek emphasizes. Lombard Odier also remains upbeat on the dollar because of interest-rate differentials versus other currency areas.

The "angry lame duck" as a new risk

Bernhard Schmitt, Head of Equity & Multi Manager Management at LLB, warns against equating Trump’s political weakening with a decline in political risks. He speaks of an "angry lame duck".

Traditionally, midterm elections followed by political gridlock on Wall Street are seen as a positive signal. Since 1950, the S&P 500 was up 12 months after all 19 midterm elections, by an average of around 15 percent. However, Schmitt considers it risky to simply apply this historical experience to the current situation.

"The less Donald Trump can achieve domestically through Congress, the more interesting those instruments of power become that he does not need it for," he analyzes. Trade policy in particular remains a factor of uncertainty. Tariffs could continue to be implemented through executive powers.

AI regulation could also change. Data protection, safety standards, and the energy consumption of data centers are likely to move further into the political spotlight. That could weigh on technology companies, while at the same time favoring investments in power generation, grids, and storage. "AI does not just need chips. AI needs outlets. A lot of outlets," Schmitt sums up the development.

Swiss companies remain under pressure

For Switzerland, the change in power in Washington does not mean all-clear. Santosh Brivio, Head of Economic Research at Migros Bank, sees the stronger franc and still uncertain U.S. trade policy as particular headwinds.

The initial market reactions pointed to a shift in allocation: stocks fell, U.S. Treasuries gained, and the dollar lost ground against the franc. Brivio sums up the development: "Less fiscal growth fantasy, more demand for safety."

Lower government spending could limit inflationary pressure and give the U.S. Federal Reserve more room to maneuver. However, Brivio does not expect a quick turn in interest rates. Geopolitical risks and high energy prices also remain in place.

He is particularly critical of the outlook for foreign trade. A Democratic majority does not mean that U.S. tariffs will be rolled back quickly. On the contrary, Trump could interpret his election defeat as a defiant reaction and announce additional tariffs. "Political headwinds in Washington are not yet a tailwind for trade policy in the rest of the world," Brivio warns.

A stronger franc against the dollar and euro also hurts the competitiveness of Swiss exporters and reduces the value of foreign revenues. Industrial and consumer goods companies could be hit especially hard.

Asia is watching rates, the dollar, and China

The power shift is also likely to change less in Asia-Pacific markets than initially expected. David Chao, Global Market Strategist for Asia-Pacific at Invesco, sees the region’s key drivers remaining U.S. rates, the dollar, and trade policy.

Less fiscal stimulus could reduce upward pressure on U.S. growth, inflation, and bond yields. Asian currencies could benefit from that. However, Chao does not expect a fundamental change in relations with China. "We do not expect the elections to change the basic relationship between the U.S. and China," he says. Tariffs, export controls, and technology restrictions are likely to continue causing uncertainty.

Politically weakened, but by no means powerless

The experts’ assessments show that a Democratic majority does not automatically mean a fundamental shift in economic policy. Rather, Washington is likely to be shaped by mutual blockades over the next two years. That can limit the government’s fiscal room for maneuver and calm markets to some extent.

At the same time, Trump’s options outside Congress remain considerable. In particular, he could continue to spring surprises on tariffs and geopolitical decisions. For investors, the decisive factor will therefore be how Trump handles his diminished domestic political power. After all, a lame duck is not necessarily a harmless one.