The US mid-terms might matter…a bit

28 October 2026

• The US mid-term elections are becoming a focal point for jumpy investors


• Current ‘age of turbulence’ implies portfolios could swing on the outcome


• But history suggests that growth, inflation, rates and earnings matter more

American politics remain deeply polarised, with the cultural divisions characterising the 2024 presidential election showing no sign of abating. Naturally enough, investors tend to look at political outcomes as having immediate capital market consequences. The instinct is understandable enough given that the US Congress determines taxation, spending and regulation while also influencing foreign policy.

But investors should be careful before assuming a linear relationship between electoral outcomes and investment outcomes. Chart 1 (below) shows how the S&P 500 Index has fared in the twelve months before and after all the US mid-terms since 1982. As with general elections, the evidence is frustratingly (or reassuringly) inconclusive. Yes, US stockmarkets since the 1980s have mostly risen after mid-term elections, but the reasons for this have tended to lie more persuasively beyond Washington DC rather than in it.

For example, the 1994 mid-term elections occurred during a period of strong economic expansion, the so-called Clinton boom. The 2010 mid-terms followed the 2008 Global Financial Crisis and the unprecedented monetary and fiscal stimulus which drove stockmarkets upwards. The 2018 mid-terms took place while earnings growth remained robust amid Donald Trump’s deregulation drive, despite escalating US-China trade tensions. In other words, fundamentals mattered far more than politics.

Chart 1: Not what you think – stocks have rallied after mid-terms, but usually for other reasons

Data from 31 October 1981 to 13 October 2026

As the 2026 mid-term elections approach, investors should again be reassured that elections tend to receive excessive attention precisely because they are observable and lend themselves to endless discussion. The economy, demographics, monetary policy, productivity, valuations and the take-up of artificial intelligence (AI) offer less immediate spectacle but are generally much more important. Investors should therefore try to resist the temptation to see the mid-terms as a binary market event, far less trade around it.

That said, the 2026 mid-terms do appear to offer some potentially different scenarios which set them apart. By way of example, the chart below shows how the probability of the Democrats taking the Senate, as indicated by Polymarket¹, has become highly correlated with diesel prices.

Chart 2: Single issue – prediction markets are linking diesel prices with Democrats’ prospects

From 28 Sep 2025 to 13 Oct 2026

At first glance this seems to be an odd correlation, but both variables are simply responding to the same geopolitical challenges which have pushed the oil price, and therefore gasoline and diesel prices at the pumps, upwards. In short, voters are angry at rising prices being forced on them by the current Trump administration and see Democrats as offering a way out of the Iran war and therefore high energy costs too.

Similarly, it is no secret that many voters are sceptical if not outright fearful of AI, with the Republicans seemingly leaning towards minimal regulation while Democrats have talked openly about taxing data centres² and imposing ‘guardrails’ on the nascent technology. Both themes are highly emotive and have coalesced around this particular electoral season, suggesting that framing what the various electoral outcomes might be in November could be a more useful exercise than usual.

Starting with the Republicans, their potential hold of Congress could well be viewed favourably by many parts of the market. Republicans generally favour a lighter-touch approach to regulation, particularly around emerging technologies³. For AI companies and investors, this could mean a lighter regulatory touch at a time when AI adoption is accelerating rapidly.

Supporters would argue that this preserves innovation and allows the US to maintain its lead against international competitors, particularly around so-called ‘frontier’ AI which represents the technology’s cutting edge. Equity markets have often welcomed deregulation in the past. Reduced regulatory uncertainty can encourage capital expenditure and risk-taking, while removing the friction of doing business. AI, financials and the traditional energy sector could particularly benefit from a continuation of the status quo.

However, there are downsides too. President Trump has secured tight control of the Republican Party and a Republican-controlled Congress is naturally going to be less inclined to impose constraints on foreign policy initiatives involving Iran and the wider Middle East. Indeed, a resumption of the Iran war is a possibility, with the US President recently reportedly rejecting a proposed seven-day ceasefire and telling aides to expect bombing to resume after the mid-terms⁴.

Clearly, a continuation or escalation of regional tensions would almost certainly maintain upward pressure on energy prices, possible forcing the US Federal Reserve to raise rates more than markets might like.

A Democratic sweep presents a different blend of risks and opportunities. The obvious concern for equity markets would be regulation. Parts of the Democratic Party, including Senator Elizabeth Warren, have expressed increasing interest in establishing safeguards and a higher tax burden on AI, platform companies and data usage⁵.

Investors focused on the explosive earnings growth currently being generated across the US tech ecosystem may worry that additional regulation will slow innovation and raise compliance costs, which will feed through to slower corporate earnings.

However, a Democrat victory could potentially place greater emphasis on limiting overseas military engagement or constraining the scale of involvement in Middle Eastern conflicts via limits on funding and, controversially, a war powers resolution. If this contributed to lower geopolitical risk, energy markets could accordingly moderate which would be supportive for consumers, beneficial for inflation and helpful for central banks everywhere seeking to avoid unnecessary monetary policy tightening.

Investors looking for a simple answer to whether it’s better for the Republicans or Democrats to hold Congress will therefore be disappointed. Republican control potentially means less regulation but greater energy risk. Democratic control potentially means more regulation but less energy risk.

But there is also a reason for continued wariness regardless of outcome. Neither party appears particularly interested in addressing America's fiscal trajectory. The US national debt now exceeds USD 40 trillion⁶. Regardless of political affiliation, there is little appetite for meaningful deficit reduction.

While Republicans generally favour lower taxation and Democrats increased public investment, neither appear prepared to deal with the huge spending on individual entitlements, particularly Medicare⁷ and Medicaid⁸ which started in the mid-1960s and have grown dramatically in size and cost⁹ since.

For bond investors today, this matters more than the current election headlines. Persistent and growing deficits imply more Treasury bond issuance and upward pressure on long-term yields, which have been rising in recent months. At some point, the total return available from bonds could become far more appealing than the forward earnings yield on stocks. As with previous elections, investors may find themselves expending intellectual bandwidth on political outcomes only to discover that some of the more important variables were never going to change anyway.

Given the blend of different pros and cons for each outcome, and the fact that some things won’t change regardless, in my view, the appropriate conclusion for investors looking for actionable insights must be to maintain a balance.

First, investors should stay carefully engaged in markets if that’s what their professionally led suitability assessment has recommended. History provides little support for dramatic portfolio repositioning based purely on electoral forecasts. Instead, they would likely be better served ensuring that portfolio diversification remains as robust and reliable as possible.

Three examples to consider in this area might be as follows:

• Insurance-linked bonds, which can provide diversification through return drivers largely unrelated to traditional financial markets.
• Gold, which can offer potential protection against geopolitical and fiscal uncertainty.
• For US dollar investors at least, short-dated Treasury bills yielding more than 4%*, which offer a rare combination of liquidity and income with no real duration¹⁰ or credit risk.

The mid-term elections will undoubtedly generate headlines and breathless media coverage, perhaps even volatility. But, while their ability to shape markets this time may be slightly higher than recent instances given the AI and energy price stories, they are unlikely to be the dominant factor during what remains of 2026.

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.