JPMorgan: The New Investment Logic Under a "Blue Wave"

Podcast source: JPMorgan

Compiled by: 404K

JPMorgan Chief Global Economist Kasman and Head of the Geopolitical Center Chalet analyze that Democrats retaking Congress tilts fiscal policy toward easing, widening the deficit and creating upward pressure on interest rates in 2027; the Fed faces the risk of personnel turnover, while conflict in the Middle East and Latin American politics continue to disrupt the global FX and trade environment.

Participants: Host Kathleen Melody; guests Bruce Kasman and Derek Chalet. The body uses "Host," "Kasman" and "Chalet" as short labels.

Host: Welcome to JPMorgan's "Making Sense." I'm Kathleen Melody, head of federal government relations at JPMorgan. Today, first, JPMorgan Chief Global Economist Bruce Kasman joins us to discuss how the U.S. election results will shape U.S. fiscal policy and federal borrowing, and which transmission channels to watch globally, especially rates and FX markets. Then — well, let's get started. Bruce, thank you very much for joining us.

Kasman: Thank you, Kathleen, glad to be here.

Host: Let's start with the U.S. midterm elections. Democrats now control Congress while Republicans still hold the White House — what are the main moving parts for U.S. fiscal policy next year? How do you think this will affect the budget deficit? Will anything change on tariffs?

Kasman: With Congress in Democratic hands and the White House in Republican hands, I think there are basically two core variables. First, next year's budget originally included major cuts to social welfare spending, particularly in health care. We think that as Democrats gain more leverage in Congress — especially when they have to vote next year on the budget and on extending the debt ceiling — there is a very high probability that these welfare cuts get pulled back. That is already in our forecast; even if Democrats had only taken the House, this is what we expected. So from a macroeconomic perspective, that is already a done deal. I think the biggest question is that the full cuts may not be implemented, which will inevitably affect the budget deficit. The other question is whether tariff policy changes, against the backdrop of the investigations currently under way. I do think there is a desire within Congress to push for removing tariffs. How this tug-of-war ultimately plays out, we are not fully confident about right now. But our baseline forecast remains that tariff rates will actually rise slightly next year.

Host: Thank you, Bruce, that is very helpful. Did the midterm results change your forecasts for growth or GDP, or largely reinforce the existing baseline? Did they change the distribution of risks around that outlook?

Kasman: On the changes to our forecasts, I want to emphasize that, given that Democrats won at least one chamber of Congress, we had already built a fiscal policy shift into our model. In addition, we had also incorporated falling oil prices into our expectations. Against that backdrop, the most important point is that these developments reinforce our existing baseline, reducing the risk of oil prices staying persistently high, and also removing part of the risk of a big U.S. fiscal tightening. The risk that could arise, and that we had not discussed much in our forecasts, is that fiscal policy could in fact shift more aggressively toward easing. On one hand that could add some momentum to growth, but on the other it could start to put pressure on the budget deficit and, I think, could transmit into slightly higher interest rates in 2027. So these are more of a tilt toward the risk side, rather than a shake-up of our baseline. Again, I would emphasize,

Host: Thank you for that, Bruce. How are the U.S. election results having knock-on effects on the global economy? Do you think the bigger shock shows up through foreign policy and oil prices, or through a potential effect on tech spending?

Kasman: I think the effects are indeed transmitting, but it will depend more on the impact on foreign policy. On foreign policy, the president of course still has considerable discretion. And whether these signals bring substantive change. The biggest at the moment

Speaker C: variable

Kasman: factor is where oil prices go. If a decline in oil prices is validated by some degree of de-escalation in the Middle East, I think that would play an important role in the macro outlook. That too is already in our forecast. We have been assuming oil prices would step down notably in the first half of next year. I think the election results at least marginally reinforce that trend. On the other hand, tech stocks and tech spending overall may face discussion of stricter restrictions at the state, local and even federal level. We tend to downplay the substantive impact there, and see the hit to the tech spending cycle as limited. We think the more critical variables are Fed policy, access to credit, and whether the broader corporate sector maintains sufficient confidence and comfort on capex, as its 2027 plans suggest.

Host: One argument emerging after the Democratic sweep concerns worries about the growth boom. Does your team share similar concerns about growth?

Kasman: I think this election result will further intensify the pressure that is building to restrict data center construction. That in turn corroborates the view that tech spending growth will slow somewhat in 2027. Again, this is already in our forecast; we do not think the election itself changes that trajectory. I think the core question is whether this delivers a more significant blow to earnings expectations, constrains the sector more deeply, and thereby puts more downward pressure on asset prices and possibly affects access to credit. The biggest risk is whether the concerns generated by the political shift create more financial market stress. If that happens, it could feed back into the macro outlook. As we look at the 2027 outlook, this is definitely one of the risks we flag.

Host: Bruce, how do you see the midterm results affecting the Fed? Will it change the degree to which the administration pressures the Fed? And what does a Democrat-led Senate mean for Fed appointments and confirmations?

Speaker: I think

Kasman: In considering the election's impact on the Fed, I would first point out that we have always emphasized in our thinking that the Fed is not materially swayed by administration pressure. But I do think it will have some effect on Fed personnel. It is now obvious that any Fed official's confirmation must go through a Democrat-led Senate. I think this matters in two respects: first, the administration had been pressuring Lisa Cook and, to some extent, Chair Powell to step down so it could have the chance to install more like-minded members on the board, and that pressure may ease somewhat. If you simply cannot get your preferred candidates confirmed, the practical payoff of pressure is very limited. On the other hand, for members who had been inclined to leave but hesitated over concerns about who would replace them, there is now more room to depart. With Democrats handling confirmations, that concern is significantly reduced. So Chair Powell, whose term runs to early 2028, may leave early. I think one or two other members of the committee may also leave early, and next year we may see more turnover at the Fed than previously expected.

Host: Okay, Bruce, one last question for you. As the largest economy in Latin America, how might Brazil's election results reshape trade and financial conditions in the region?

Kasman: Brazil's election result was clearly somewhat surprising; Lula in office should in a sense be seen as policy continuity. From our perspective, the core issue is that its budget is already extremely stretched and badly needs substantive fiscal consolidation. How forcefully the new Lula government pushes in that direction is still not entirely clear. With the market doubting this and pushing down the country's currency, we have been revising our forecasts, removing some of the central bank easing we had expected over the coming year. More broadly, regional relationships are key. In particular, it had been widely assumed that if Bolsonaro won, Brazil-Argentina relations would be reshaped and the Mercosur agreement would face pressure for adjustment, potentially affecting the U.S. and regional trade. Those variables that were being considered have now been overturned to some extent. At the regional level, the real focus is how far this result spills over into and is reflected in Argentina's 2027 election.

Host: Bruce, thank you very much for systematically laying out the immediate market and macro implications, especially around fiscal pressure, borrowing needs, and how these results transmit to rates, FX and regional financial conditions. Thank you very much for taking the time to share your insights. Next, I would like to broaden the view and welcome Derek Chalet. Derek, welcome to the program.

Chalet: Glad to talk with you, thanks for having me.

Host: Derek, you have called the U.S. midterm elections the decisive domestic pivot of 2026. Having heard the above, now that the U.S. midterms are settled, which policy areas are you watching most closely?

Chalet: Sure. The scale and impact of the midterms cannot be overstated. What people used to call the "blue wave," people have now started calling a "blue tsunami." I think there was broad consensus on the direction beforehand — that is, people expected Democrats to win the House and possibly, even probably, take the Senate. But I think the severity of the shift — not just winning a majority, but decisive, overwhelming majorities in both chambers — is something very few people truly anticipated. So we are still working out the full implications of all this. On one hand it will be a major shock; on the other, the substantive change may be limited, because the U.S. president has historically had enormous discretion in foreign policy. As we have seen historically, presidents in the last two years of a second term often shift their focus to foreign policy. We saw this with Ronald Reagan, Bill Clinton, George W. Bush and Barack Obama. I expect to see a similar shift in the Trump administration, because a president in the final two years of a second term typically faces an opposition Congress, making it hard to accomplish much on the domestic agenda,

Speaker: while on

Chalet: foreign policy there is more room to maneuver. So I expect the president to remain extremely active on foreign policy. Of course, Congress can also interfere; it can set or steer the policy agenda by introducing bills and holding hearings. I expect we will see some early moves when the new Democratic Congress is seated in January — I think Congress will very early introduce, and likely pass, legislation backed not only by Democrats but probably by some Republicans as well, to limit or even remove some of the tariffs imposed on countries like Canada. In addition, depending on how the conflict unfolds in a few months — but one of the clear signals from the midterms is that — so I expect there will be some response on that front as well. Overall, we still need to digest the full implications of these changes and their effect on 2028. But what is entirely certain is that the policy environment a few months from now will be very different from the past two years.

Host: Great, thank you. If we look further out,

Chalet: One of the most unexpected things about Tuesday night is exactly the area we are still working through, which is that Democrats won many states that Democrats have not won for years or even decades. For example, Kansas has not elected a Democratic senator since the 1930s; Texas has not elected a Democratic senator since 1988. These states not only flipped, they flipped decisively — not narrow wins, but in Texas even a double-digit landslide. That completely reshapes the political map for 2028. In past presidential elections, Democrats would not spend much energy or time thinking about how to win Texas; now they must invest time and energy in building there. This opens up enormous scope for imagination and strategic options for future presidential elections. It will also change the profile of the candidates who want to run. Over the past few years there has been an internal Democratic discussion between moderates and the progressive left. I think that discussion will undoubtedly continue, but the core now is finding a new type of candidate who can be competitive in Texas, rather than focusing only on traditional deep-blue states or the familiar upper-Midwest "blue wall" map of past cycles. The paths to victory are more varied.

Speaker: The winning

Chalet: paths are more varied. I think this fundamentally changes the discussion about where politics goes from here. Because many of the newly elected Democrats are representatives who flipped traditional red areas, I actually expect more centrist, moderate discussion at some levels in Washington.

Speaker: Many

Chalet: of the voters these new members represent cast ballots for Republicans in the last election and even in past elections. So to establish themselves and win re-election, they must not only satisfy core Democratic voters but also accommodate and represent the interests of these moderate and more conservative voters. In a period of extreme polarization, very few politicians have had to attend to voters of both parties at once, and now a large influx of new Democrats must attend to both sides. I think that is beneficial for the political system overall; it will bring some change to the atmosphere of policy debate in Washington.

Host: I completely agree, and I think that is true within both parties. Derek, how do you think the midterm results will affect how this conflict plays out?

Kasman: It certainly does.

Chalet: It mainly shows up in the U.S. strategy for responding to this crisis. It should be emphasized that both parties have also consistently held deep skepticism about Russia's motives and credibility. Now within Congress, Democrats plus a majority of Republicans form a solid majority, and they will actively seek ways to support Ukraine and further increase pressure on Russia and the costs it bears. In the weeks before the midterms, but to date, that authorization has not actually been used. So I expect that if the situation remains stalled when the new Congress is seated in January, Congress will take legislative action to force the president to use powers already granted to step up sanctions on Russia. The same goes for aid to Ukraine; for many years Congress has always provided massive aid to Ukraine on the basis of bipartisan support. Two years ago the U.S. somewhat stepped back from direct support, so I expect legislative activity in Congress seeking to again push the administration to restore and increase support for Ukraine.

Speaker: The president

Chalet: The president has veto power. Overriding a presidential veto is extremely difficult, because it requires reaching the high threshold of two-thirds approval in both chambers. But on Ukraine, I think it may be possible to assemble enough votes to override a veto. So we will see. At the same time, this process will unfold against the backdrop of the administration doing everything it can to secure some kind of solution on Ukraine. A meeting bringing together the Ukrainian and Russian sides is due to be held in Abu Dhabi soon. Over the past few weeks we have already seen a great deal of intensive diplomacy. So on one hand we will see something of a restart, or at least an attempt to push a restart, of U.S. support for Ukraine; on the other, administration-led diplomatic shuttling over Ukraine will only become more intensive.

Host: Turning next to Israel. This election has been described as one of the most far-reaching in the country's history. Were you surprised by the result? How might this change Israel's position in the international landscape?

Chalet: Between Brazil, Israel and the U.S., this is clearly a heavy election month. As an aside, next year will also be a big election year, especially in France, Poland and Italy in Europe. I think the Israeli election result is on one hand expected and on the other quite surprising. Expected in that all polls showed it would be a close race. Prime Minister Netanyahu's governing coalition lost quite a few seats, but its overall performance was still slightly better than expected. The surprise was the strong showing of Israel's Arab parties. Many people may not have realized or may have forgotten — this really was surprising. Israel has a coalition system completely different from that of the U.S., with a multitude of parties. We are now in a period of political bargaining that could last weeks or even months, as the parties need to bridge differences to form a governing coalition, and there are many possible combinations for the final shape. I expect the coming weeks to be filled with intensely tense behind-the-scenes maneuvering and compromises over interests. Could a coalition in which Netanyahu is still involved ultimately emerge? The broader point is that Israelis also understand that their new government will have a profound impact on the wider U.S.-Israel relationship, given that discussions within both U.S. parties about that relationship are shifting. As Republicans reflect on Tuesday night's lessons and their future direction, some people — including the vice president this week — have already raised questions about the future prospects of the U.S.-Israel relationship and their implications.

Host: You did touch on this, but I want to press a bit more directly: how will the U.S. and Israeli election results affect the current Middle East conflict? Has the risk of escalation risen or fallen?

Chalet: Frankly, we do not know yet. Before the election — and I am even more convinced of this now — the lesson from the midterms is likely that we must seek a deal or find a way out. After the election it has likewise not become any more popular. Yet the U.S. is caught in a kind of dilemma: the situation is unresolved, Iran can still threaten the strait, and energy prices remain high. So I think the administration will try hard to find some kind of solution. Unfortunately, I do not think Iran currently has any particular incentive to cooperate with the U.S. on a compromise and hand the U.S. a so-called victory. So I think for most of the next two years we will still have to face intermittent military exchanges and repeated friction.

Host: Thank you, Derek. The last question is for you. Looking at Latin America, to what extent do Brazil's election results reverse the region's overall shift to the right? And what does that signal for the rest of the world?

Chalet: For many people, Brazil's election result was somewhat unexpected. In the first round of voting in early October, opposition candidate Flávio Bolsonaro had held a fairly steady lead of two to three points, and it was widely expected that incumbent President Lula would lose, but Lula ultimately pulled off a comeback by a narrow margin, which really was surprising. As you said in your question, the region has shown a rightward shift in recent years. I cannot be sure whether Brazil represents a complete reversal of that trend; Brazil is the largest economy in South America and an important trading partner of the U.S. As is well known, Brazil's President Lula, just re-elected, and President Trump do not have a particularly cordial relationship, and the two sides have previously had very heated verbal exchanges over trade. So it is foreseeable that such ups and downs will most likely persist in the future. Now Brazil's president has a stronger hand after winning re-election, while the U.S. president is entering the final stretch of his term and equally hopes to make his mark on the international stage to cement his historical legacy. I think this will have a major impact not only on the region but also globally.

Host: These insights are extremely valuable, Derek. Very glad you could join our discussion today; your views are exceptionally sharp. Thank you very much!

Chalet: Thanks for having me.

Speaker C: Thank you for listening to JPMorgan's "Making Sense." This communication is for informational purposes only. Please visit the relevant disclosure page for important disclosures. Copyright 2026 JPMorgan Chase & Co. All rights reserved.

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