There has been no shortage of uncertainty over the past year. Trade policy, geopolitical tensions, affordability pressures, AI-related concerns and conflict in the Middle East have all shaped the investment outlook. With the U.S. midterm elections approaching on November 3, investors are now grappling with an additional source of uncertainty.

This year's election is widely viewed as an important test for U.S. policymaking. Since returning to office, President Trump has benefited from unified Republican control of Congress, enabling the administration to advance key elements of its legislative agenda despite narrow majorities and frequent procedural hurdles. The midterms will determine whether that dynamic persists during the final two years of the administration, or whether a divided government emerges to act as a constraint on further policy initiatives.

While the composition of Congress will undoubtedly influence policy at the sector level, particularly highly contested sectors such as healthcare, election outcomes alone are unlikely to alter the broader economic or market outlook. For investors, the focus should be less on who controls Congress, and more on whether policy changes meaningfully affect economic growth, inflation, corporate earnings or other fundamental drivers of asset prices. 

Historically, the S&P 500 has posted modest gains during midterm years, rising 7.1% on average since 1928, followed by significantly stronger performance in the year after the midterm election, with average returns of 17.8%. Midterm years have generally delivered the weakest returns within the four-year presidential cycle, yet market performance has historically strengthened in both the three- and six-month periods following the election. Notably, the S&P 500 has not declined in the 12 months following a midterm election since 1938.

Equity market dynamics today have largely reinforced the historical lesson that economic fundamentals matter more for performance than politics. Despite elevated policy uncertainty, trade tensions, geopolitical conflicts and periodic bouts of market volatility since President Trump's inauguration, equities have remained remarkably resilient.

Strong household and corporate balance sheets, ongoing fiscal support, robust earnings growth, and continued enthusiasm surrounding AI-driven investment have helped offset concerns about the policy environment. While political developments have periodically triggered market pullbacks, those episodes have generally proved short-lived as investors refocused on underlying economic and earnings fundamentals. Perhaps most notably, market performance since Trump's second inauguration has broadly mirrored the path seen during his first term.

For investors, the message is straightforward. While election headlines may generate short-term volatility, medium-term market performance is likely to depend far more on the trajectory of economic growth, inflation, Federal Reserve policy, and corporate earnings than on the precise composition of Congress after November.

Midterm elections typically serve as a referendum on the sitting president. Recent declines in President Trump's approval ratings suggest growing voter dissatisfaction amid persistent affordability pressures and elevated economic uncertainty. As a result, the political environment has become increasingly challenging for Republicans, who already hold only narrow majorities in both chambers of Congress.

All 435 seats in the House of Representatives are contested every two years. Republicans currently hold a narrow majority with 218 seats, compared with 212 for Democrats (alongside one independent and four vacancies).

History presents a difficult backdrop for the governing party. In 18 of the past 20 midterm elections, the president's party has lost ground to the opposition. Combined with rising voter dissatisfaction, this has increased expectations that Democrats could regain control of the House. Prediction markets currently assign a high probability to such an outcome.

The Senate presents a more balanced picture. Senators serve six-year terms, with roughly one-third of seats contested every two years. Republicans currently hold 53 seats, while Democrats hold 47.

Although Democratic prospects have improved as several races have become more competitive during the year, gaining Senate control remains a considerably more difficult task than flipping the House. While prediction markets see the race for control of the Senate as highly competitive, the outcome remains close to a coin toss.

Although it’s unlikely, a Democratic sweep of Congress cannot be ruled out. Notably, if such a result were to occur, it would create greater scope for a meaningful shift in fiscal policy negotiations even if Democrats secured only narrow majorities.

The most likely outcome, however, remains a divided Congress. In that environment, legislative gridlock would limit the scope for major policy changes outside areas of bipartisan agreement. A Democratic-controlled House would also constrain the administration's ability to advance additional partisan fiscal initiatives on both tax and spending during its final two years, increasing the importance of executive action and regulatory policy as vehicles for policy implementation.

Ultimately for investors the distinction between unified and divided government matters less than the extent to which policy changes influence economic fundamentals.

AI infrastructure: the most important secular policy debate

AI remains one of the most powerful global investment themes, but its rapid expansion is increasingly colliding with local political concerns. Rising demand for data centers, power generation, and grid infrastructure has fueled opposition centered on energy consumption, water usage, noise, and environmental impacts. As a result, some jurisdictions are beginning to introduce restrictions on new development.

At the federal level, however, there is little evidence that either party wants to meaningfully impede the AI infrastructure buildout. Policymakers continue to view AI as an economic and national-security priority, supporting efforts to accelerate permitting, expand generation capacity and modernize the electric grid.

The key risk is therefore not a shift in federal policy, but a broadening of local opposition that slows project development in certain regions. Such delays could create headwinds for AI-related investment and the energy infrastructure needed to support future capacity growth. Even so, decisions around data center development are likely to remain primarily a state and local issue, suggesting the midterms are unlikely to materially alter the long-term trajectory of AI investment.

Affordability: a bipartisan issue

Affordability pressure has become a central political issue and one that is unlikely to disappear regardless of the election outcome. Policymakers from both parties remain focused on measures to reduce household costs, increase transparency, and ease pressure on lower-income consumers.

While legislative progress may be constrained under a divided Congress, a Democratic sweep could create greater momentum behind measures targeting healthcare costs, consumer fees, prescription drug pricing, and other areas perceived to contribute to affordability concerns.

The near-term macroeconomic impact of these initiatives is likely to be modest. However, a sustained shift toward more populist policymaking could have longer-term implications for healthcare, financial services, and other sectors directly affected by regulatory intervention.

Fiscal policy: constrained, unless the tails emerge

With Republicans broadly expected to lose control of the House, there may be an incentive to advance additional spending and tax initiatives via the reconciliation process before the new Congress is seated. Beyond that, the most likely outcome is legislative gridlock, limiting the scope for major changes to the fiscal outlook until the next debt ceiling debate by mid-2027.

A Democratic sweep would represent the primary upside risk to fiscal expansion. Narrow majorities would create practical constraints and limit any spending increases done on a party-line vote. Yet, there remains risk that Democrats are able to extract policy concessions from big legislative fights that require bipartisan agreement, such as the debt ceiling, pushing spending and tax initiatives through.

While such measures could support near-term growth, they would also add to concerns around an already unsustainable fiscal trajectory. In turn, this would likely place upward pressure on bond yields, increase debt sustainability concerns, and raise the risk that private-sector investment is crowded out over time.

Foreign policy: continuity rather than change

A key question for investors is whether the midterms could reduce geopolitical volatility. The answer is probably no.

The U.S. Constitution grants the executive branch significant authority over foreign policy, while history suggests outgoing presidents often place greater emphasis on geopolitical initiatives during the final years of their term. As a result, the composition of Congress is unlikely to materially alter the administration's approach to trade, China, Iran or Latin America.

Tariffs are therefore likely to remain elevated, while broader efforts to reshape supply chains and reduce strategic dependence on China are expected to continue.

Sector implications could nevertheless vary. Defense companies may face greater scrutiny around their ability to meet U.S. procurement demands, adding momentum to policy proposals that will limit the industry’s ability to execute stock buybacks or the size of dividend payments. Meanwhile, Metals & Mining could benefit from continued bipartisan support for securing access to critical minerals and reducing reliance on Chinese supply chains. By contrast, parts of the Consumer and Industrial sectors may continue to face cost pressures from elevated trade barriers.

Historically, midterm elections have not been a major driver of market performance. Rather, it is the underlying macroeconomic backdrop and its influence on earnings, inflation, and interest rates that determine market direction. This cycle is unlikely to be different.

The most likely outcome remains a divided government, which would limit legislative activity and reinforce the status quo across much of the policy landscape. While certain sectors may be affected by affordability initiatives, regulatory developments, or fiscal negotiations, the broader market trajectory will likely continue to depend on economic growth, inflation trends, Federal Reserve policy, and the evolution of the AI investment cycle.

Ultimately, the election may influence the policy environment, but history suggests that markets will continue to take their cue from the economy. Absent a material deterioration in growth, earnings, or financial conditions, the midterms alone shouldn’t alter the broader direction of risk assets.