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Donald Trump has suffered one of the heaviest defeats of his political career. In an election widely seen as a referendum on his presidency, Democrats took control of both the House and the Senate.

As of Wednesday afternoon European time (GMT + 2), Democrats had secured 236 House seats, 18 more than needed for a majority, compared with 146 for Republicans, with many races still undecided. In the Senate, they flipped seven Republican seats, including in Texas, Ohio, Kansas and Maine.

The president’s party usually struggles in midterms, but the size of this loss is being read as a clear rejection of Trump’s two years back in the White House. Trump said he would accept the results, while insisting he did not see them as a blow to him personally. He also signaled he would use his veto against the Democratic agenda, posting an image of a red cap stitched with the word “VETO,” though he told the New York Times he was open to working with Democrats.

Why Republicans Lost

Rising prices. The cost of living dominated the campaign. Prices rose 3.7% in the 12 months to September, pushed up by fuel and energy costs, and diesel prices in early October were close to September’s record of $6.52 a gallon. In voter surveys, 79% said inflation had caused their families moderate or severe hardship, and more than six in 10 blamed Trump’s policies. About two-thirds said his tariffs had hurt the economy.

An unpopular war. The war with Iran, launched by the US and Israel in February, was a key driver of higher prices after Tehran effectively shut the Strait of Hormuz, a vital route for global oil and LNG shipments. Around 63% of voters said attacking Iran was the wrong decision, and 74% said the conflict was a major or crucial factor in their vote. For some MAGA supporters, the war also broke Trump’s “America First” promise of no new wars. Trump acknowledged on Fox News that the war played a role in the defeat but defended it as necessary to stop Iran from getting a nuclear weapon.

Strong Democratic candidates. Democrats fielded candidates who came across as authentic and kept their focus on the cost of living and health care. Former teacher James Talarico in Texas and pastor Adam Hamilton in Kansas spoke openly about their faith, which resonated in both states. Former pediatrician Annie Andrews scored an upset in South Carolina, Abdul El-Sayed held a Democratic seat in Michigan, and Senator Jon Ossoff won reelection comfortably in Georgia, fueling talk of a 2028 presidential bid. Trump himself admitted Democrats “did a good job.” Some Republican candidates, such as Ken Paxton in Texas, were criticized for campaigns that strayed from voters’ concerns.

Trump as a liability. With prices and the war tied directly to the president, his falling approval ratings, even among Republicans, made states he carried in 2024 vulnerable. He urged supporters to vote as if he were on the ballot, a strategy that appears to have backfired. In his final campaign speech, he spent much of his time discussing his controversial renovation of the Reflecting Pool.

Hispanic and Black voters swing back. The gains Republicans made with some Hispanic and Black voters in 2024 appear to have reversed. Democrats won all three House districts along the Texas-Mexico border, and majority-Hispanic counties shifted more than 22 points against Republican Senate candidates compared with 2024, according to a New York Times analysis. The swing comes amid widespread anger over immigration enforcement, with 56% of Americans viewing ICE unfavorably, according to Pew. Majority-Black counties also moved toward Democrats, and in Mississippi, Scott Colom was in a tight race to become the state’s first Democratic senator since 1982.

Tariffs: Little Relief for Europe

A Democratic Congress is unlikely to end Trump’s tariff threat against Europe. After the Supreme Court struck down his emergency tariffs in February, the administration shifted them to Section 301 of US trade law, which allows the president to act without a congressional vote. Democrats can hold hearings and delay nominees, but they cannot easily strip that authority away.

James Smith, an economist at ING, argued that a divided government could even push Trump to rely more on trade, one of the areas where he can act alone. He did not rule out new tariffs on Europe, which he said would have a significant impact on US inflation and Federal Reserve policy.

Ukraine: Money on Paper, Not in Hand

When the new Congress takes office in January, Democrats will chair Senate committees and control the confirmation of Trump’s nominees. Many want to approve new funding for Ukraine. The challenge is making sure that money is actually spent. In the past two years, the White House has let congressionally approved funds expire by holding them until the end of the fiscal year.

Nevada Joan Lee of the European Council on Foreign Relations warned that Congress could pass aid for Ukraine that the president simply never releases. She advised European governments to rely only on money that arrives, treating earmarked funds as “intent, not commitment.”

How Markets Reacted

European stocks rose after a shaky start. By mid-morning, the Euro Stoxx 50 was up 0.8%, Germany’s DAX 0.6% and Spain’s IBEX 35 1.6%, while S&P 500 futures edged up 0.2%.

Banks led the gains, with Deutsche Bank, Intesa Sanpaolo, Commerzbank, Société Générale, Santander and UniCredit all up around 3% or more. Clean energy stocks, which suffered under Trump’s policies, also jumped, with Ørsted up 7.3% and Vestas 5.2%.

Defense stocks fell on concerns that a Democratic Congress could slow the growth of US military spending, a key market for many European arms makers. BAE Systems dropped 5.2%, followed by Hensoldt, Thales, Saab, Rheinmetall, Dassault Aviation and Leonardo.

Gold climbed 2.7% to $4,035 an ounce and silver rose 4%. The euro gained 0.5% to $1.1247 as the dollar weakened. US Treasuries rallied, with the 10-year yield falling to 4.93%. Bitcoin rose 1.3% to about $78,300, and Brent crude hovered near $104 a barrel.

Is Gridlock Good for Investors?

Markets have traditionally welcomed divided government, since fewer major laws mean fewer surprises. Luca Bindelli of Lombard Odier noted that 10-year Treasury yields have fallen by an average of 20 to 25 basis points in the three months after past midterms. Diego Barnuevo of Ebury said a Democratic sweep could be neutral to slightly positive for US finances, as Congress may rein in Trump’s spending plans.

Ed Yardeni of Yardeni Research was more cautious, warning that this time could be different. His main concern is the debt ceiling, which a divided Washington will have to raise. A long standoff could push borrowing costs higher, and Barnuevo expects the limit to become binding sometime in 2027.

For the euro, analysts expect little lasting impact. ING’s currency strategists said the dollar remains driven mainly by the Federal Reserve rather than Congress. The euro also faces its own pressures, including high energy prices linked to the Iran war, eurozone inflation of around 4% and rising yields on French government bonds.

The new Congress will be sworn in in January. Until then, Republicans keep their majorities in both chambers, and even afterward, Trump will still have his veto.