U.S. Midterm Elections: What Asset Managers Expect and the Impact on Markets
19 OCT, 2026
On November 3, Americans will renew all 435 seats in the House of Representatives and 35 of the 100 seats in the Senate. The U.S. midterm elections will be the first major test of Donald Trump’s second term, and they are taking place in an unfavorable climate for the party in power.
For investors, however, the election goes beyond domestic politics. The new balance of power in Congress will determine the trajectory of tariffs, the evolution of the federal deficit, and the White House’s room to continue with its deregulatory agenda. Although the consensus points to a divided government, the implications for equities and fixed income are far from neutral.
Who will win the U.S. midterm elections?
The machine-learning model presented by Bob Gilhooly, senior emerging markets economist at Aberdeen Investments, predicts that Democrats will regain the House of Representatives and that the Senate will be tied 50–50, with Vice President JD Vance casting the deciding vote. Gilhooly adds: "over the past 18 months, momentum has clearly shifted against Republicans. But momentum alone does not decide elections."
Amr Hanafy, research analyst at Neuberger, notes that prediction markets assign a 65% probability to a sweeping Democratic victory. Meanwhile, Lizzy Galbraith, political economist at Aberdeen Investments, says: "The most interesting question for investors is whether that political discontent is strong enough to overcome the structural advantages Republicans enjoy in the Senate."
The deterioration in the outlook for the Republican camp is clear to Nicolas Bickel, head of private banking investments and CIO at Edmond de Rothschild, who cites inflation, the conflict with Iran, and the unpopularity of tariffs. However, he warns that the rise of the Democratic Party’s more radical wing could work against it: "the opposition party could lose some of this advantage by putting forward radical candidates."
How do the midterm elections affect the U.S. stock market?
"Midterm election years have historically been the weakest years of the presidential cycle," notes Hanafy (Neuberger). Since 1950, the S&P 500 has risen by an average of 4.6% in those years, compared with 11.2% in the others. That said, the index has traded higher 12 months after every postwar midterm election.
Along the same lines, Bickel (Edmond de Rothschild) emphasizes that "historically, markets have been only marginally influenced by political factors and have been driven primarily by microeconomic and macroeconomic fundamentals." His analysis since 1970 shows that, regardless of the outcome, equities have consistently posted positive returns six months after elections.
That does not mean the road ahead will be clear. Hanafy (Neuberger) warns: "We expect volatility to rise initially, as investors price in closer scrutiny of the artificial intelligence and financial sectors."
What will happen to the fiscal deficit and Treasury bonds after the midterms?
If there is one point of consensus among asset managers, it is that fiscal pressure will persist regardless of the outcome. Hanafy (Neuberger) sums it up: "Democrats want more healthcare spending, Republicans want more defense spending, and neither wants tax increases, so deficits will remain close to 6% of GDP."
Meanwhile, Gilhooly and Galbraith (Aberdeen Investments) believe a divided Congress could impose some fiscal discipline over time. Even so, they consider it unlikely that spending pressures will disappear, given the costs of the conflict with Iran and Democrats' determination to reverse the Medicaid cuts. Bickel (Edmond de Rothschild) adds that the Congressional Budget Office has raised its estimate of the ten-year deficit to $1.4 trillion.
Raphaël Gallardo, Chief Economist at Carmignac, quantifies the risk. If the Democrats were to win both chambers, the fiscal impulse could shift from negative to positive, with a swing of around 1% of GDP. In his view, "a sweeping Democratic victory would therefore probably be positive for equities, but negative for the duration of U.S. assets".
A Republican resurgence would not eliminate the risk either. Gallardo (Carmignac) notes that Trump has proposed a $5,000 “dividend” for every American, equivalent to 4% of GDP. He concludes that "in both scenarios, the risks appear tilted toward continued fiscal expansion". This reinforces his cautious view on the duration of U.S. debt, particularly at the long end of the curve.
Which sectors could benefit after the midterm elections?
For the medium and long term, Hanafy (Neuberger) identifies three investment themes:
- Defense and security: replenishing ammunition stocks and multiyear programs have bipartisan support, regardless of which party controls Congress.
- Healthcare: revenues are less tied to the economic cycle, and a Democratic Congress could reinstate insurance subsidies, directly supporting hospitals and insurers.
- AI infrastructure during periods of weakness: any post-election setback would present an entry opportunity. Energy, the power grid, and electrification offer exposure with lower concentration risk.
In all three cases, the analyst favors quality, because "strong balance sheets and stable earnings have historically delivered better results over the medium-term horizon".
Conclusion
Asset managers agree that the midterm elections will not change the factor weighing most heavily on portfolios: a structural deficit that neither party seems willing to address.
That shifts the focus from the electoral bet to positioning. The key considerations are caution on the duration of U.S. debt, a quality bias in equities, and exposure to themes with bipartisan support. In this context, the volatility accompanying the vote count will be more of an entry window than an exit signal.
Disclaimer: This article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any asset. Past performance does not guarantee future results. Investing in U.S. equities involves market, volatility, and sector concentration risks. Investing in U.S. Treasury bonds is subject to interest rate, duration, and currency risks. Political and fiscal developments may significantly affect the valuation of both asset classes. The views expressed are those of their authors at Neuberger, Aberdeen Investments, Edmond de Rothschild, and Carmignac.
