Industrial Securities: Outlook on U.S. Politics, Midterm Elections, and Sino-U.S. Bilateral Relations in 2026

1. 2026 U.S. Political and Midterm Election Fundamentals

The midterm elections are for the U.S. Congress’s House of Representatives and Senate, scheduled for November 3, 2026. The House has 435 seats, with members serving two-year terms and all seats up for election every two years; the Senate has 100 seats, with members serving six-year terms and one-third up for election every two years. The U.S. Congress operates under a single-member district system, dividing the country into 435 districts, each electing one representative. Senate seats are evenly distributed among the 50 states, with two seats per state.

(I) House of Representatives: Current polls and historical elections show Democratic gains are on the rise

In the House, Republicans currently hold 220 seats, Democrats 213, meaning Democrats only need to net a few seats to flip control. This indicates that national political cycles have a greater impact on Democrats. According to current polls and the “midterm curse”—the tendency for the opposition party to perform better in midterms—Democrats may be experiencing an upward trend.

1. Party support and its influence on midterm elections

Although midterms are local elections, party support rates remain a key determinant of election outcomes. Political cycles tend to be synchronized nationwide; Trump’s approval ratings and previous election trends strongly influence midterm results. First, midterms are viewed as a trust vote in the ruling party, and Trump’s approval rate changes serve as a direct indicator of next year’s results. Second, current U.S. politics are dominated by polarization. For example, mainstream voters in deep-red areas tend to vote consistently for their side across mayoral, gubernatorial, House, Senate, and presidential elections. Third, lower turnout in local elections means candidates often rely on endorsements from Washington political figures, further strengthening the link between voter turnout, party support, and presidential approval.

Various polls show that Trump’s approval ratings in his first year in office were not high. In 2025, economic issues continued to be a top concern for voters. However, tariffs, immigration policies, and the polarization of the U.S. economy (K-shaped recovery) have made it difficult for Trump’s economic image to sustain. Trump’s net support declined throughout 2025. State-by-state, deep-red states like Nebraska, Kansas, North Dakota, and Arkansas saw support decline toward the end of the year. Demographically, support for Trump remains divided across gender, education, race, and party lines. Only Republicans and less-educated white voters show positive net support; support among other groups has turned negative.

2. Media narratives and their impact on midterm elections

The correlation between national and regional elections is high, mainly influenced by media “echo chambers.” Over the past 50 years, trust in mainstream media among Americans has declined. Supporters of the Republican Party trust mainstream media even less, with confidence levels at 51% for Democrats and only 8% for Republicans, both at historic lows. Within mainstream media, a clear trust divide exists between the parties.

3. Statistical patterns and their influence on midterm elections

Historical data shows opposition parties tend to perform better in the House. Since 1946, only in 1998 and 2002 has the ruling party gained House seats in midterms; in other years, they lost seats. Out of 39 midterm elections since the Civil War, the ruling party lost the House 36 times, a 92% rate.

(II) Senate: Republicans are likely to hold control; Democrats need to win in shallow-red districts to flip

1. Republicans currently lead in the Senate, holding 51 seats in non-competitive and red-leaning districts

The current Senate composition is 53 Republicans and 47 Democrats. Democrats need to net four seats to reach a majority of 51. In 2026, 33 Senate seats will be up for election; since Manchin and Rubio are in cabinet positions (creating two vacancies), a total of 35 seats are contested. Of the 65 seats not up for election, Democrats hold 34, Republicans 31. Among the 35 seats up for election, Democrats currently lead in 11 districts, Republicans in 20. Under baseline assumptions, Republicans would secure at least 51 seats (31 incumbents plus 20 districts favoring them), Democrats at least 45 (34 incumbents plus 11 districts). To flip control, Democrats must win at least six districts currently leaning Republican.

2. Democrats have a possible but challenging path to control the Senate

Among the 35 contested districts, only four—Georgia (Ossoff’s district), Michigan (open seat), Maine (Collins’s district), North Carolina (open seat)—are truly competitive. Democrats would need to win all four and flip at least two more Republican-leaning districts, such as Ohio (Husted), Iowa (open), and Texas (Cornyn, if the incumbent does not run). These shallow-red districts heavily favored Trump in 2020 and 2024, requiring Democrats to achieve broader social and political support. Additionally, flipping the 17 deep-red seats is even more difficult amid current polarization. The most vulnerable Republican seat is Ohio-Husted, which in 2020 and 2024 voted for Trump with margins of 53.3%-45.2% and 55.1%-43.9%, respectively.

2. Key variables influencing the 2026 U.S. political landscape and midterm elections

(I) Healthcare remains a battleground, with Republicans increasingly taking the lead on proposals

1. The Affordable Care Act (ACA) has made healthcare a fiscal issue

The current healthcare disputes stem from the 2014 passage of Obamacare. The ACA aimed to make health insurance more affordable but also contributed to rising premiums.

To expand coverage, the ACA extended Medicaid to low-income adults earning below 138% of the Federal Poverty Level (FPL), allowed those under 26 to stay on parental plans, and mandated companies with over 50 employees to provide insurance. As a result, uninsured rates dropped sharply from about 16% pre-2010 to around 7-8%, a historic low.

Insurance companies cannot deny coverage or charge higher premiums based on pre-existing conditions; all plans must cover ten essential health benefits, including outpatient, emergency, hospitalization, maternity, mental health, prescriptions, rehab, labs, preventive services, and pediatric care. Preventive services are free, including vaccines and screenings.

2. The core fiscal component of the ACA is the premium tax credit (PTC) policy

The ACA offers standardized plans (bronze, silver, gold, platinum) and provides tax credits (PTC) to families earning 100%-400% of FPL, covering a portion of premiums. During open enrollment, applicants estimate their income for the upcoming year, and based on tax filings, subsidies are paid directly to insurers monthly. This government subsidy model increases government spending as premiums rise, becoming a significant fiscal burden.

3. The expanded PTC (ePTC) has increased fiscal burdens; its removal would raise costs for consumers

During the pandemic, the Biden administration introduced enhanced PTC (ePTC) as temporary aid, benefiting middle-income groups but also raising premiums and costs. Under original ACA rules, households earning over 400% FPL were ineligible for subsidies, creating a “subsidy cliff.” The 2021 American Rescue Plan expanded eligibility, allowing those earning 100%-150% FPL to access free silver plans and providing subsidies to families earning above 400% FPL if premiums exceed 8.5% of income.

Looking ahead, if premium increases and the expiration of ePTC occur simultaneously, household costs could rise significantly. If ePTC expires, average out-of-pocket premiums could increase by over 75%, adding to overall expenses. Initial rate proposals from 312 insurers for 2026 show a median increase of 18%, more than double last year’s 7%.

Therefore, extending ePTC enjoys bipartisan support. Over 84% of enrollees favor extension, including 72% of MAGA supporters and 75% of non-MAGA Republicans. Even within the GOP, support remains high. This indicates that opposition to extension would require credible fiscal alternatives, as voters are unlikely to bear the burden of years of premium hikes. Both parties are likely to continue sharing the costs through the federal budget, balancing crisis management and technological progress.

(II) Despite declining inflation figures, “living costs” remain a dominant campaign theme

Trump built his image on economic prowess, but “cost of living” issues now pose a liability. Housing, premiums, student loans, energy, and groceries are perceived as highly sticky inflation factors.

Regarding the economy, Trump’s policies—“free-market liberalism” and “administrative intervention”—are gradually taking effect. This hybrid approach, which could be called “right-wing liberalism with left-wing intervention,” involves deregulation and tax cuts alongside executive orders targeting drug companies, supermarkets, and other intermediaries to lower prices, sometimes using tariffs as leverage.

On prices, Democrats emphasize income subsidies, while Trump focuses on wealth effects. Both parties recognize worsening financial conditions and see controlling prices as key to electoral success. Democrats advocate higher taxes on the wealthy and large corporations to fund healthcare; Trump emphasizes the investment value of the stock market. Currently, Americans expect economic conditions to worsen over the next year but also believe their wealth will improve, reflecting Trump’s narrative of boosting the economy through stock and crypto wealth effects.

(III) Fierce competition over district redistricting, with significant implications for House control

1. Redistricting can create unfair advantages for partisan gains

The sharp decline in competitive districts due to increased polarization makes redistricting a key battleground. As polarization consolidates core supporters, the number of truly swing districts has fallen to about 40, making redistricting outcomes critical. Redistricting decisions involve mobilizing resources from courts, governors, and congressional leaders. To regain the House, Democrats need to focus on competitive districts; Republicans aim to break the cycle through a “power grab.”

2. Redistricting occurs every 10 years based on census data, with districts apportioned accordingly

The Constitution mandates a decennial census to allocate House seats proportionally. The 435 seats are divided among states based on population, with districts drawn to contain roughly equal populations. Gerrymandering strategies—“packing” (concentrating opposition voters) and “cracking” (diluting their influence)—are used to secure safe seats for each party.

3. Current partisan balance in House districts and the importance of redistricting

Among six states with new district maps, Republicans netted three seats; in states without finalized maps, Democrats could net over three seats. In the five states with results, Republicans gained nine seats (Texas +5, Missouri +1, North Carolina +1, Ohio +2), while Democrats gained six (California +5, Utah +1). In the six states pending maps, Democrats are projected to gain over three seats, with some states led by Republicans and others by Democrats. Legal challenges are ongoing, with courts and parties contesting district boundaries, adding uncertainty.

4. The expansion of executive power under Trump and potential conflicts with state and federal institutions

a. Trump’s second term has seen a surge in executive orders, surpassing his first term’s total. By December 2025, he had signed 225 orders, 55 memos, and 114 proclamations, advancing legislative goals through executive action, including tariffs and deregulation.

b. His approach—“fast action, slow legislative response”—has reshaped many aspects of society. For example, tariffs on China via executive orders have faced legal challenges, as tariffs are Congress’s domain. Other policies on taxes, immigration, and voting require congressional approval, but Trump’s rapid issuance of executive orders has created de facto changes.

c. Besides orders, Trump frequently issues memos and proclamations to signal policy directions, which lack formal legal standing but influence administrative actions. In 2025, he used 55 memos to push deregulation in energy, social policy, immigration, and trade, often bypassing legislative processes.

d. If midterms result in divided government, Trump’s executive authority could be further constrained, with courts and Congress reasserting control over tariffs, legal interpretations, and federal spending. For example, a Supreme Court ruling could limit the president’s tariff powers, and Congress could restrict or rescind executive orders.

(IV) The potential for executive overreach and subsequent restrictions

Trump’s frequent use of executive orders and memos risks provoking legal and institutional pushback. If courts or Congress curtail his authority—such as ruling tariffs unconstitutional or limiting executive discretion—his ability to unilaterally shape policy would diminish, possibly leading to a more balanced separation of powers.

1. Judicial and legislative limits on tariffs and executive actions

a. The Supreme Court could rule tariffs based on the International Emergency Economic Powers Act (IEEPA) unconstitutional, forcing reliance on alternative statutes like the Trade Act of 1974 or the Smoot-Hawley Tariff Act of 1930, both of which have their own legal and political constraints.

b. The Court’s recent decisions, such as the June 2024 ruling in the LoperBright case, have signaled a shift away from broad deference to executive agencies, potentially limiting future presidential tariff powers.

c. Congress may also seek to restrict or define the scope of executive authority, especially if tariffs or other measures are challenged in courts.

2. State and local legal challenges

Trump’s policies—such as halting foreign aid or ending birthright citizenship—have prompted lawsuits from states and localities. These legal battles could further limit executive actions and increase administrative burdens.

(V) U.S.-China relations amid domestic political shifts

1. Overall, U.S.-China relations are expected to remain relatively stable, with mutual interests in avoiding escalation. China needs the U.S. to maintain stability in high-tech, finance, and supply chains. The U.S. seeks to prevent decoupling from China’s markets and technology.

2. Trump’s policies—such as export controls and anti-monopoly investigations—will influence bilateral dynamics. China may respond with countermeasures, including restricting U.S. exports or pursuing investigations into U.S. firms operating in China.

3. The bilateral relationship will be shaped by broader geopolitical factors, but both sides are likely to avoid full-scale conflict, focusing instead on strategic competition and economic decoupling in select sectors.

2. Trump’s need to coordinate with China on export controls and antitrust policies

China’s exports of rare earths, graphite, superhard materials, and electronics are critical. China’s small commodities and supply chains give it cost advantages in U.S. markets. Restrictions or quotas on these could impact U.S. inflation and consumer prices, influencing midterm support.

China can also leverage anti-monopoly laws to investigate U.S. firms in China, creating bargaining chips and promoting domestic alternatives. In imports, China controls key sectors like movies, energy, soybeans, and aircraft. For example, in April 2025, China announced plans to reduce U.S. film imports, and it could increase energy purchases or restrict imports as retaliatory measures. China’s large aircraft market and soybean imports give it leverage in trade negotiations.

3. Overall, the U.S.-China bilateral relationship in mid-2026 faces more favorable factors than risks

a. Tariff constraints are likely to tighten politically during the midterms, possibly leading to trade disruptions. If tensions escalate, inflation and growth could suffer, hurting Republican prospects. Conversely, if tensions ease, it could undermine Trump’s exaggerated “win-win” narrative, weakening his personal image.

b. Despite hawkish rhetoric, U.S. policymakers cannot fully constrain Trump’s approach to China. The president has significant discretion, and the current Congress and courts lack the capacity to limit his policies effectively. Trump’s strong electoral mandate and control over the legislative agenda enable him to pursue an independent China policy, including trade and diplomacy.

c. Trump’s view of China is pragmatic: he sees China as a source of economic opportunity rather than a strategic adversary. His focus is on extracting maximum benefits through negotiations, often expressing a desire for China’s success. This approach reduces the likelihood of a systemic confrontation, favoring transactional diplomacy.

If the WTO’s ruling on IEEPA declares tariffs unconstitutional, the U.S. may resort to alternative tariffs, increasing uncertainty in bilateral relations. Trump might invoke other statutes like the Trade Act of 1974 or the Smoot-Hawley Tariff Act, but these come with legal and political risks, potentially leading to further disputes and instability.

Risk Warnings

Resumption of U.S. export controls; tariffs exceeding expectations; significant changes in external geopolitical situations.

(Source: Industrial Securities)