Ian Hui
Global Market Strategist
Published:
Midterms can affect the policy backdrop, but they do not change the entire investment environment on their own.
In Brief
- Polls point to Democrats potentially taking at least one chamber of Congress and a rising chance of winning both. This would make President Trump’s domestic agenda harder to pass, though major shifts in policy direction are still unlikely.
- The main market relevance is policy uncertainty, not the election itself. Growth, inflation, earnings, interest rates and Fed policy should remain the bigger drivers of returns.
- Investors should stay focused on fundamentals rather than politics. Different outcomes may affect sectors such as Healthcare, Technology and Financials, but history suggests markets often refocus on fundamentals once election uncertainty fades.
U.S. midterm elections are less than a month away, with polls scheduled for November 3, 2026. The election will determine all members of the House of Representatives and around one-third of the Senate, the two chambers that make up Congress. For investors, the biggest implication of the election is how much the election results impact President Trump’s policy agenda in the final two years of his term. Current polls suggest that the most probable outcome is divided government, with at least one chamber of Congress controlled by the Democratic Party. Polls have shifted to reflect a chance that Democrats win both the House and the Senate. However, even if Democrats take both chambers, they are unlikely to secure a large enough majority to fully override presidential authority. As a result, we expect only limited change to the overall policy direction in the near term, although the route to getting policy passed could become more difficult.
Why the midterms matter, and why they don’t
Republicans currently control the White House and both chambers of Congress, giving them unified government. However, their majority in the House is narrow, making control of that chamber particularly vulnerable at the midterms. The Senate race is more finely balanced, with the outcome likely to depend on a smaller number of competitive seats.
The midterm election is often seen as a gauge of how satisfied voters are with the sitting president. It can change which political party controls Congress, which in turn affects what laws can be passed and how much of the president’s agenda can be implemented. For markets, this matters because Congress plays an important role in fiscal policy, government spending, taxation and the debt ceiling.
That said, investors should avoid overstating the importance of the election in isolation. Midterms can affect the policy backdrop, but they do not change the entire investment environment on their own. Growth, inflation, earnings, interest rates and central bank policy are still likely to matter more for market returns over time.
The current backdrop
A post-2024 redistricting exercise should have helped Republicans at this year’s midterms. However, current polling suggests the party faces an uphill battle to retain control of the House. President Trump’s approval ratings have deteriorated, with the Middle East conflict contributing to higher gasoline and diesel prices, while mortgage costs and consumer debt remain concerns for households. Concerns over access to and affordability of healthcare, as well as concerns around immigration enforcement, have also weighed on the administration’s popularity in parts of the country.
With only a narrow House majority to begin with (Republicans currently hold 218 plus 1 independent who regularly votes with them to 214 Democratic seats and 2 vacancies), and approval ratings under pressure, Republicans face a meaningful challenge in maintaining control. A Republican loss in the House appears highly likely according to current polls. However, the margin of victory for Democrats will also be important to watch, as it could shape the party’s policy direction and confidence heading into the 2028 presidential race.
The Senate is a closer contest. Of the 35 seats up for election, many are considered relatively safe for either party, meaning the result will depend on a small number of competitive races. Polls suggest Democrats have momentum, but the path to taking control of the Senate is still difficult.
The key question is whether the election produces a Congress that helps President Trump advance his agenda, or one that slows it down and forces the administration to rely more heavily on executive authority. The lesson from the first two years of President Trump’s term is that he is willing to use executive orders and non-traditional paths to implement his policy agenda.
Possible outcomes
The midterms could leave Republicans in control of Congress, produce divided government, or give Democrats control of both the House and Senate. If Democrats take one or both chambers, President Trump’s domestic agenda would become much harder to pass, likely shifting the focus toward executive action in areas where the president has more unilateral authority. Trade and tariffs are the clearest examples. This is especially relevant to Asia, as changes in U.S. trade policy can affect export-oriented economies, supply chains, manufacturing sectors, inflation expectations and currencies. A Democratic-controlled Congress would also increase oversight of the administration and, if Democrats win the Senate, give them greater influence over judicial, Federal Reserve and other key appointments. If Republicans retain both chambers, the administration could have more room to pursue its agenda, though large fiscal measures would still face constraints from deficit concerns and divisions within the party.
Stay focused
One cardinal rule for investors is not to let views about politics overrule investment discipline. History suggests that macro conditions are usually a more important driver of returns than the political party in power.
Investment implications
The S&P 500 has generally delivered positive returns in the calendar year following a midterm election year, with an average gain of around 3%, as can be seen in exhibit 1. But no statistic should be viewed in isolation. Past midterm cycles have unfolded against very different economic backdrops, and today’s environment has its own risks and opportunities.
In a divided government, the Healthcare sector could benefit as the possibility of cuts to government healthcare programs would diminish. Democratic control is likely to see greater regulatory risks for AI and datacenter themes, but more focus will be on government funding, oversight and unwinding existing policies. Democratic control or a divided government has the greatest chance of limiting fiscal stimulus and may ease inflation and spending concerns, which in turn might put a cap on yields moving further upward. If Republicans maintain control, we see a favorable environment for increased AI infrastructure buildout, greater government spending and Financials benefiting from deregulation and less oversight.
The broader lesson is that markets dislike uncertainty, and elections create uncertainty. Once the political configuration becomes clearer, markets tend to refocus on fundamentals and policy implementation. Political calendars do not drive markets on their own.
History is on the side of investors after midterms, and an environment which is seeing solid earnings, steady growth, strong investment and a less aggressive Fed than feared gives us confidence that this cycle can follow the pattern. Rather than trying to trade around the election, investors should stay invested, remain diversified and keep their focus on the longer-term drivers of returns.