How Wall Street analysts think the midterms could affect stocks
The midterm elections could reshape Congress as lawmakers grapple with persistent inflation, high energy prices and rising fiscal debt. For investors, by contrast, the political outcome could deliver a boost.
Data from financial firm Edward Jones shows that the S&P 500 stock index rose an average of 1.7% in the month after the last 14 midterm races, dating back to 1970. In the six months following midterm elections, S&P 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," Magdalena Ocampo, market strategist at the global investment firm Principal Asset Management, said in an email on Tuesday as Americans cast their votes.
With congressional control in the balance, Wall Street analysts are also considering the impact divided government could have on stocks if the Democrats win the House, Senate or both chambers. Political gridlock has historically been good for markets because it limits Congress' ability to pass sweeping tax and spending legislation, reducing the risk of volatility, according to analysts.
"Less change makes a more predictable environment, which allows companies to invest in longer-term projects," Chris Low, chief economist at FHN Financial, a capital markets firm, said in an email Tuesday. "That tends to be good for earnings."
Less stock market volatility doesn't guarantee investors an easy ride, however. Gridlock in Washington, D.C., could also fuel another partisan standoff on the nation's debt, which recently surpassed $40 trillion, or spur the U.S. government to increase its borrowing to fund its priorities, according to economists.
That could unnerve bond investors, who are worried that Washington is on an unsustainable fiscal trajectory, Ed Yardeni, president of Yardeni Research, said in a note to investors.
"Prolonged shutdowns and fiscal standoffs could push Treasury yields higher, weighing on equity valuations," he said.
The Bipartisan Policy Center, a Washington, D.C.-based think tank, estimates that the U.S. will reach the debt limit again sometime between late winter and midsummer of 2027. At that point, lawmakers will have to decide whether to raise the debt ceiling, temporarily suspend it or risk another government shutdown.
Volatility could also persist if President Trump continues to rely on his executive authority to accomplish his priorities, Yardeni said. In that case, Democrats would have little power to restrain Mr. Trump even if they controlled Congress, he noted.
"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," Yardeni said.
A Democratic sweep could have other implications for the economy beyond financial markets. That could include Democrats blocking Trump-appointed regulators, according to Jaret Seiberg, a financial policy analyst and managing director at investment bank TD Cowen.
"They [could] leverage this power to force the President to fill Democratic seats on independent agencies like the FDIC, SEC and CFTC," he said.
A Democratic majority in the Senate would also elevate Sen. Elizabeth Warren, a Democrat from Massachusetts, to head the Senate Banking Committee, giving her more latitude to pass populist legislation, Seiberg added. Warren would replace South Carolina Republican Sen. Tim Scott, who currently chairs the influential panel.
However, lawmakers would still be restricted in what they can do at a federal level, given the president's ability to veto legislation, UBS analysts said in a research note.
Edited by Alain Sherter
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