US Midterms Could Reshape Markets, Tech Sector, UBS Predicts

Midterm elections in the United States on November 3 could significantly alter global financial markets, with a Swiss bank, UBS, forecasting a high probability of Democratic victories impacting U.S. interest rates, government bond prices, and the future of artificial intelligence companies. UBS analysts presented a special forecast assessing potential changes in Congress and their consequences for investors. The most likely scenario, according to UBS, is Democrats gaining control of both houses of Congress, a 50% probability that would represent a significant political defeat for President Donald Trump. A further 40% chance exists for Democrats winning only the House of Representatives while Republicans retain the Senate. The probability of Trump's party holding both chambers is estimated at just 10%. These projections are already prompting investors to prepare for potential shifts in Washington's economic policy, with particular attention on taxes, government spending, and the regulation of major American corporations. The tech sector, especially AI development firms, may face increased scrutiny and investigations due to growing concerns about its impact on employment, data security, and corporate activities. However, the passage of new restrictive laws is not guaranteed, as Democrats would still need to overcome Senate procedural hurdles and potential presidential vetoes. Significant consequences are also anticipated for the U.S. budget, with debt ceiling negotiations in 2027 potentially leading to renewed clashes between Congress and the White House. These agreements could affect social programs and defense spending, potentially halting deficit reduction if spending outpaces revenue growth. For financial markets, this could mean an increased issuance of U.S. government bonds, influencing their yields, especially if negotiations are prolonged. UBS, however, offers a more optimistic outlook on interest rates, expecting a slowdown in the U.S. economy and inflation to allow the Federal Reserve to conclude its rate-hiking cycle. By 2027, government bond yields might stabilize at a slightly lower level, altering financing conditions for companies globally. The developments are directly relevant to Israel, as the U.S. stock market is a key investment area for Israelis, and changes in U.S. interest rates and bond yields can affect asset values. Israeli tech startups working with U.S. clients and investors could also be impacted by stricter U.S. AI regulation. Beyond Congress, elections for governors in 36 states and 164 local referendums are scheduled, with Democrats potentially gaining two to four governorships, influencing state-level decisions on energy, healthcare, education, and housing. Despite potential shifts in Congress, UBS does not predict an immediate stock market crash, attributing future stock performance largely to corporate profits and actual policy changes. The primary uncertainty lies in the extent of the conflict between Trump and the Democrats, which could affect global financial markets, including Israel's, if it impacts the budget, taxes, and business regulation.