US Election

Aggregate Senate betting market pricing appears too pessimistic on Democrats relative to state-level odds and early polling, suggesting a potential mispricing and a relatively sanguine attitude towards the still-unresolved conflict in Iran and its aftermath.

Markets may be underpricing a bifurcated political outcome. Unless the Iran deescalation succeeds, the delayed economic fallout from the energy shock could materially worsen Republican prospects and raise the probability of a Democratic Senate victory.

The spike in oil and gas prices has raised the odds of a global economic downturn. Combined with a more negative signal from our MacroQuant model, this warrants tactically downgrading stocks from neutral to underweight. Looking further ahead, the Iran war will lead to bigger defense budgets and a greater focus on energy self-sufficiency.

An energy price spike caused by a Middle Eastern war almost guarantees that Republicans will lose control of the House, and the chance of a Democratic Senate victory increases from 35% to 40%.

President Donald Trump’s political capital is moderate, as he frontloaded his most disruptive policies within the first year. 

The US is ripe for a third major political party, but the two-party system will probably prevail in the 2028 election. The macro context will determine whether the US elects a left-wing populist. 

Simple games allow us to model several of the Trump administration’s most disruptive policies in 2025. We find that markets face an increase in volatility as Congress expands the budget, Trump implements tariffs on the world, China retaliates, and Taiwan tensions persist. A ceasefire in Ukraine is a marginally positive outcome for Europe, although it is not a long-term peace treaty. 

We were stopped out of our defensive asset allocation recommendations last Thursday, when the S&P 500 closed above 6,100, but our reading of the labor market tea leaves still supports a bearish fundamental view.