Key takeaways:
- History favours staying invested. While markets are often volatile in the lead-up to US midterm elections, the year following the vote has historically been one of the strongest periods for US equities.
- Political gridlock could support markets. Although Democrats have won control of Congress, presidential veto power may limit major policy changes, helping to preserve a degree of legislative gridlock and reducing the likelihood of abrupt shifts in policy.
- Focus on opportunities, not headlines. Investors should look beyond election outcomes and pay close attention to sector-specific impacts, bond markets, and currency positioning as economic fundamentals return to the forefront.
What’s the story?
Democrats claimed a decisive victory in the US midterm elections, winning control of both the House of Representatives and the Senate and ending the Republican dominance of Congress. The result was widely seen as a rebuke of President Donald Trump’s policies, with voter frustration over the rising cost of living, tariffs, inflation, and the administration’s handling of the conflict with Iran playing a central role.
Yet, the Democrats’ majority in Congress should only have a limited impact on US economic policy given the extensive use of presidential executive orders. Against a backdrop of excessive inflation, a falling share of labour income, and deteriorating governance, the Democratic election victory could lead to a shift towards less business-oriented policies that prioritise redistributive measures instead.
Nevertheless, the traditional Wall Street view is that divided government tends to support markets because it makes major policy changes harder to enact. An even more market-friendly outcome could be a split Congress, where control of the House and Senate is divided between the parties. That would create an additional layer of political gridlock, further reducing the likelihood of significant legislative change.
Equities: Markets tend to perform well after US midterm elections
The year following a midterm election has historically been one of the strongest periods for US equities. Critically, across the past 19 midterm election cycles, the S&P 500 posted a positive return every time in the twelve months after the election. Investors should of course bear in mind that past performance is not a reliable indicator of future results. Nevertheless, once elections pass and political uncertainty fades, investors typically focus on earnings and macroeconomic data again.
Taking a more granular look at the US equity market, our equity strategists note that policy implications may be more challenging for banks, as well as oil & gas. When it comes to artificial intelligence, the ‘blue wave’ could mean more scrutiny and marginally slower, costlier data-centre approvals and developments, mainly at state and local level, but this does not mean AI spending will stop or derail meaningfully from current trends. The AI ecosystem continues to see demand outstripping supply. The impact on healthcare might be more mixed. The new political constellation looks favourable to clean energy, where existing funding could receive greater protection despite the headwind from high financing costs.
How to invest: Our playbook for the 2026 US midterms
- Equities: Legislative gridlock should be positive for US equities, taking history as a guide. At the same time, rising domestic policy uncertainty strengthens the case for international diversification through a broader mix of earnings drivers, valuations, and sector exposures.
- Fixed income: The risk of further unfunded fiscal packages has been lowered and there is a Democratic check on future Federal Reserve appointments. For fixed income investors, this supports intermediate-duration quality bonds as protection against growth shocks, while shorter-duration credit offers increasingly more attractive carry opportunity.
- Currencies: Legislative gridlock reduces the risk of one-sided policies that could lead to sharp moves in the USD in the short term, while structural weakness is likely to persist in the long term, weighing on the greenback.
- Gold: The Democratic sweep is unlikely to lastingly change a constructive fundamental outlook. While lower bond yields could make gold more alluring, easing fears of fiscal irresponsibility could weigh on the precious metal. Concerns about US indebtedness and the associated interest-rate burden should provide support to gold in the longer term.
The economy is the bottom line
Elections rarely alter markets’ long-term direction. But they do impact sectors and sentiment and thus may create opportunities. The weight of historical evidence across eight decades, various economic regimes, and every political constellation points in a clear direction: midterm-year volatility has historically represented an opportunity. For investors, the lesson is simple: stay diversified, stay disciplined, and use periods of uncertainty as opportunities rather than reasons to step aside.
Key risks to monitor
Beyond the risk of a new flare-up in geopolitical tensions, the primary market risk to an otherwise constructive backdrop is the 2027 debt ceiling. The US Treasury is expected to hit the USD 41.1 trillion statutory limit in 2027, and a Democratic Congress may resist a clean increase. Protracted negotiations could distort T-bills, pressure the US dollar and risk assets, weaken confidence, and temporarily lift the term premium ahead of the deadline.