US midterms: why a divided Washington could suit markets

With two months to go until the US midterm elections, Republicans, led by President Donald Trump, face a difficult fight to retain control of Congress. Trump’s approval rating remains below 50%¹, Democrats are favoured to regain the House and the Senate race is on a knife edge².

Markets often become less settled as midterms approach, as investors assess the possible policy consequences while the result remains uncertain. Once the vote is over, uncertainty begins to fall. Equities have historically tended to rally in the months after midterm elections, although the wider economic and earnings backdrop remains more important over time.

Our recent article examined why November’s elections could become a major test of Donald Trump’s presidency. Since then, the campaign has drawn closer and the political backdrop has become more complex. Several states have redrawn congressional districts, making some House seats³ safer for one party or the other.⁴ That makes the eventual number of seats won by each party harder to predict from national polling alone.

Midterms usually work against the incumbent party in the White House. The president is not on the ballot, but the administration’s policies are. Voters who are unhappy with the direction of the country can use the election to provide a check on the government, while opposition supporters often turn out in greater numbers than they do during presidential elections.

The historical record is consistent. Since 1946, the president’s party has lost House seats in 18 of 20 midterm elections⁵. The two exceptions were 1998, when Bill Clinton’s Democrats gained seats, and 2002, when George W. Bush’s Republicans gained seats following the 9/11 attacks. Approval ratings point in the same direction. Gallup’s analysis found that every president in its sample with approval below 50% shortly before a midterm lost House seats. Trump is currently below that level.⁶

Trump is unlikely to leave the campaign to Republican candidates. He has already endorsed candidates, campaigned on their behalf and urged supporters to treat the election as a vote for his agenda. His involvement may increase as November approaches, particularly if turnout becomes a concern. A Republican defeat could be presented as a rejection of Trump’s presidency, while a Republican victory would strengthen his influence over the second half of his term.

The historical market pattern is more reassuring than the political one. Since 1974, the S&P 500 has delivered an average return of just 1.7% between 1 August and Election Day, a period when volatility has often risen as political uncertainty builds. Returns have historically been stronger once the vote is over: the average gain was 5.7% in the following three months and 12.4% over six months. In every midterm election in this 13-election sample, the S&P 500 was higher six months after the vote.⁷

This does not mean that elections cause markets to rise. Investors often become more comfortable once the result is known and the likely policy environment is clearer. Some uncertainty is removed, allowing attention to return to economic conditions and company earnings.

The pattern is not guaranteed. In 2022, high inflation and rapid interest-rate rises had a much greater influence on markets than the election itself.⁸ However, going into the 2026 midterms, the fundamental backdrop has been broadly supportive, with strong corporate earnings and resilient economic growth outweighing uncertainty from geopolitics and changing expectations around inflation and monetary policy.

Markets are likely to focus less on the result itself than on whether it matches what investors already expect. A surprise outcome would be more likely to move markets than one already reflected in prices. A Democratic House and Republican Senate is the outcome markets broadly expect.⁹ If confirmed, it would mean a divided government, reducing the scope for major new legislation while increasing scrutiny of the administration and the potential for difficult negotiations over spending and the debt ceiling.

However, a Republican sweep could prompt investors to revisit the outlook for tax, spending and tariff policy. A stronger-than-expected Democratic performance could place greater constraints on the current administration’s agenda and lead to more forceful oversight. In either case, the market response would depend on the implications for inflation, interest rates and company profits, as well as how investors were positioned going into the vote.

The impact could be clearest at sector level. Defence and infrastructure companies are sensitive to government spending, energy companies to tariffs and permitting, and healthcare companies to drug-pricing and regulatory policy. Technology and other growth companies have often performed well during rallies post-midterm, particularly when divided government reduces the likelihood of sweeping policy changes. Their performance will still rest on whether they can deliver on earnings expectations and on the direction of interest rates.

The result may matter more for which parts of the market lead than for the direction of the market as a whole.

Midterm uncertainty may unsettle markets before November. Once the result is known, this certainty could give equities room to rally. However, that historical tendency is not a reason to trade around the election. With economic growth and earnings broadly supportive so far, staying invested in a diversified portfolio keeps investors exposed to potential market gains. Ultimately, the lasting direction of markets will depend on the economy and company profits rather than on which party controls Congress.

The value of investments can fall as well as rise, and you may get back less than you invest. Past performance is not a reliable indicator of future results. This article is for information only and is not personal financial advice or a recommendation to buy, sell or hold any investment.

¹Reuters/Ipsos Core Political Data: Presidential Approval Tracker, Ipsos, 26 August 2026.

²Thirteen House Rating Changes Toward Democrats as Seat-by-Seat Assessment Better Aligns with Our November Expectations, Sabato’s Crystal Ball, University of Virginia Center for Politics, August 2026.

³The House of Representatives is the lower chamber of the US Congress. It has 435 elected members, each representing a local district, and all seats are contested every two years. Along with the Senate, it passes laws and approves federal spending.

⁴Redistricting Ahead of the 2026 Elections, Ballotpedia, accessed 27 August 2026.

⁵For 80 Years, the President’s Party Has Almost Always Lost House Seats in Midterm Elections, a Pattern That Makes the 2026 Congressional Outlook Clear, The Conversation, 19 January 2026.

⁶Midterm Seat Loss Averages 37 for Unpopular Presidents, Gallup, 12 September 2018.

⁷What the 2026 Midterms Could Mean for the Markets, Charles Schwab Center for Financial Research, 18 August 2026. S&P 500 price returns; dividends excluded; data from Yahoo Finance, as at 14 August 2026.

⁸The Consumer Price Index, November 2022, US Bureau of Labor Statistics, 13 December 2022; Federal Reserve Issues FOMC Statement, Federal Reserve, 14 December 2022.

⁹Balance of Power: 2026 Midterms, Polymarket, accessed 27 August 2026.