Democrats have swept back to power in the United States Congress, winning control of both the House of Representatives and the Senate in Tuesday's midterm elections and setting up two years of divided government under President Donald Trump.

The scale of the result surprised even seasoned observers. Democrats gained at least 40 seats in the House and at least seven in the Senate, according to Reuters, advancing in every part of the country, including Republican strongholds such as Texas and Kansas. Cost-of-living concerns and the conflict with Iran appeared to be the biggest drivers of the vote.

Markets recoil

Financial markets reacted sharply. The technology-heavy Nasdaq fell 5.5 per cent on Thursday, its worst day in 18 months, entering correction territory, while roughly $3 trillion was wiped from the market value of the S&P 500, according to Reuters. Investors feared that an emboldened Democratic Congress would slow the construction of the data centres powering the artificial-intelligence boom.

Oil prices swung violently. Brent crude tumbled about 9 per cent on Wednesday to around $94 a barrel, heading for its biggest weekly fall since 2020, as investors judged that the Republican defeat reduced the chances of renewed fighting in Iran. Prices then spiked nearly 4 per cent on Thursday after fresh tanker attacks in the Gulf.

A changed Washington

The new Congress, which takes its seats on 3 January 2027, will be able to block much of Mr Trump's legislative agenda and subject his administration to far closer oversight. But its power has limits: overturning a presidential veto requires two-thirds majorities in both chambers, which Democrats are far short of, and the outgoing Republican majorities will remain in place for a lame-duck session.

The immediate tests will be practical ones: funding the government beyond the stopgap law that runs to 11 December, and raising the federal debt limit, with Treasury figures showing about $798 billion of headroom remaining.

Mr Trump, who chaired a National Security Council meeting on Iran on Wednesday, said a decision on further military action against Iran would come soon, and that he intended to maintain his tariff policy. Official jobs data released on Friday showed the US economy adding 165,000 jobs in October, with unemployment falling to 4.1 per cent, a reminder that the political earthquake arrived against a still-strong labour market.

What comes next

For Democrats, the challenge now is converting a protest vote into a governing record before the next presidential election. For Mr Trump, it is governing with a hostile Congress for the final two years of his term. And for markets, the question is whether Thursday's rout was a repricing of political risk, or the start of a deeper reckoning with the valuations built on the AI boom.