The US midterm elections could give stocks a lift, with investors focused on the prospect of reduced political uncertainty and divided government in Washington.
Analysis from financial firm Edward Jones found that the S&P 500 rose by an average of 1.7% in the month after the last 14 midterm elections, dating back to 1970. Over the six months following the votes, returns averaged 15.5%.
“Volatility around the vote is possible, but markets have historically performed well in the year following midterms as political uncertainty recedes and attention returns to the economic outlook,” said Magdalena Ocampo, a market strategist at Principal Asset Management.
Investors are weighing how control of Congress could affect markets as lawmakers confront persistent inflation, high energy prices and rising fiscal debt.
A Democratic gain in the House, Senate or both chambers could produce political gridlock. Analysts said that has historically supported markets by limiting Congress’s ability to pass sweeping tax and spending measures, reducing the risk of abrupt policy changes.
“Less change makes a more predictable environment, which allows companies to invest in longer-term projects,” said Chris Low, chief economist at FHN Financial. “That tends to be good for earnings.”
Debt fears could unsettle markets
Political deadlock would not necessarily mean an easier ride for investors. Economists warned that it could contribute to another partisan dispute over the US debt, which has surpassed $40 trillion, or encourage the government to borrow more to fund its priorities.
Ed Yardeni, president of Yardeni Research, said that prospect could unsettle bond investors already concerned about Washington’s fiscal direction.
“Prolonged shutdowns and fiscal standoffs could push Treasury yields higher, weighing on equity valuations,” he said.
The US is expected to face the debt limit again between late winter and midsummer 2027. Lawmakers would then have to raise the ceiling, temporarily suspend it or risk another government shutdown.
Volatility could also continue if President Trump relies on executive authority to pursue his priorities, Mr Yardeni said. Democrats would have limited power to restrain him even if they controlled Congress, he added.
“Hence, a blue wave could deliver a cold shower for stocks, though we would view a significant selloff as a buying opportunity given the remarkable strength of the economy and corporate earnings,” Mr Yardeni said.
A Democratic sweep could also affect financial regulation. Jaret Seiberg, a financial policy analyst and managing director at TD Cowen, said Democrats could block Trump-appointed regulators or press the President to fill Democratic seats on agencies including the FDIC, SEC and CFTC.
A Democratic Senate majority could also place Senator Elizabeth Warren, the Massachusetts Democrat, in charge of the Senate Banking Committee. She would replace South Carolina Republican Senator Tim Scott as chair and could have greater scope to advance populist legislation.
However, UBS analysts said lawmakers would remain constrained at federal level by the President’s power to veto legislation.
