What different US midterm outcomes could mean for markets

[NEW YORK] The US midterm election is less than a month away, and Wall Street is bracing for stocks to fall if Democrats regain control of both houses of Congress.

Voters appear likely to hand the party a majority in at least the House of Representatives.

The outlook for the Senate is far less certain, though Democratic candidates have a polling edge in key races. With control of even one chamber, the party would gain majorities on committees that can propose legislation and hold hearings – including on topics such as artificial intelligence that are critical to the outlook for the market. 

Investors can take some amount of comfort, as history points to gains for stocks no matter the election outcome.

An analysis by Wells Fargo & Co found that the S&P 500 Index has risen in the 12 months after every midterm election in the post-World War II era.

Stock prices tend to drop in the months ahead of a midterm vote, data compiled by Truist Advisory Services show. The market then typically starts climbing again shortly before the election. But in 2026, the S&P 500 has risen 13 per cent since the start of the year, averting the typical slump.

There are additional reasons to anticipate stocks will advance no matter what happens in November.

For one, US President Donald Trump will still wield a veto over legislation that will be hard for Congress to override. That means even if Democrats control both chambers, they will have a hard time implementing tax increases or regulatory measures that markets tend to disfavour. 

Also, the economy is expected to continue growing in 2027, and consumer spending has been strong, both trends that typically lift stocks. 

Still, the 2026 election is unusual because it comes as one issue, the build-out of AI data centres, has roused voters across the political spectrum.

That adds to the stakes for investors, who would be loath to see any new restrictions on an AI infrastructure boom that has been the engine of a four-year bull market in US stocks.

Here is how different election outcomes might influence the market.

Divided congress

Wall Street pros tend to be just fine with gridlock in Washington, and that is what they can largely expect if Democrats take back just one chamber of Congress. It will be hard to get anything done with the House and Senate split and Trump able to veto any legislation the parties do agree on.

That means companies and investors can focus on earnings and the economy instead of shifting policy.

Corporate profits have boomed in 2026, and US gross domestic product has grown at a steady clip. Stuart Kaiser, Citigroup’s head US equity trading strategist, says a stymied Congress is the ideal outcome for the stock market against that backdrop. 

Gridlock has tended to hand investors strong returns in the past.

Under a Republican president and a split Congress, US stocks have advanced an average of 13.7 per cent per year since 1950, data compiled by Carson Investment Research indicate. That compares with average gains of 8.3 per cent and 4.9 per cent when Congress was controlled by Republicans and Democrats, respectively. 

Historically, a divided Congress also has tended to support bond prices, largely because gridlock reduces the room for additional fiscal stimulus such as tax cuts. That in turn could be a boon for stocks in industries such as manufacturing, by reducing borrowing costs.

The wild card in this scenario is Trump, whose tariffs and overseas interventions have caused big market swings without the involvement of Congress. 

Blue sweep

A Democratic takeover of the House and Senate might spark a sell-off in stocks.

That is in part because the party is more likely to support AI regulations, whether that is imposing restrictions on data centres or creating rules about the development of AI models themselves.

Anything that slows down the AI boom would restrict the flow of money to the chipmakers and industrial companies that supply data centres, while making it less likely that tech companies selling AI itself reap the huge profits that stock market investors will eventually demand.

Actually passing AI legislation would be tough. Trump has fashioned himself into a booster for the technology, and he is likely to veto any bill that is too restrictive.

Democrats are virtually certain to fall short of the supermajorities they would need to override his veto. That means what looks initially like a big win for Democrats could still amount to gridlock. In turn, that would probably limit the risk to earnings for AI bellwethers such as Microsoft and Nvidia.

Still, Democrats will be able to keep pressure on AI businesses by conducting investigations into the industry and holding public hearings. Investors also might read a Democratic sweep as a sign of the direction policy will take once Trump is out of office.

Under the hood, the healthcare sector might get a boost if Democrats use their leverage to walk back cuts to Medicaid, the health-insurance programme for low income Americans. Defence contractors have already slumped on concerns that the party will more closely scrutinise military spending.

In the bond market, a blue sweep could put prices under pressure if Trump, as a lame-duck president, turns more heavily to executive action, including by implementing new tariffs or raising geopolitical tensions. 

A Democratic sweep also could weigh on the US dollar, since market participants anticipate that an AI slowdown would dampen the economic outlook.

But given other factors working in the US dollar’s favour, including elevated energy prices and expectations that the US Federal Reserve will raise interest rates, the election is unlikely to move the US$9.5 trillion-a-day foreign currency market in a meaningful way.

Red sweep

If Republicans manage to keep control of both chambers of Congress, an outcome polls suggest is unlikely, it should leave intact the current favourable environment for AI stocks, said analysts.

“Status quo would not be a bad thing per se,” Manulife John Hancock Investments strategist Matt Miskin said. It could kick off a rally in financial and industrial stocks that are closely linked to the economy, as investors bet Republicans will act to juice growth. 

But that growth could drive borrowing costs higher, putting the brakes on economic expansion, and the stock market as well. BLOOMBERG