US Midterms: what matters for investors?

By Joe Aylott, Multi-Asset Strategist

• US midterms have shifted the balance of power in Congress. Historically they have also supported equity markets by resolving political uncertainty. Since 1946, the S&P 500 has delivered stronger average returns in the three months after midterms than in the three months before them.
• However, significant uncertainties will remain after the election, including AI investment, interest rates and geopolitics. In particular, bipartisan concerns over the infrastructure and energy demands of data centres could increase the cost of expanding AI capacity.
• The US economy remains resilient enough to withstand some energy-related disruption, as it demonstrated earlier this year. But renewed geopolitical uncertainty also reinforces the importance of portfolio diversification. Gold, government bonds and liquid alternatives can all play a role in providing portfolio ballast against risks that equities alone may not hedge.

Unlike a presidential election, the recent US midterm elections did not put President Donald Trump himself on the ballot. Instead, Americans voted for all 435 members of the House of Representatives and around a third of the Senate, with Trump’s Republican Party losing control of both to the Democratic Party.

And this is not unusual. Since 1945, the president’s party has lost seats in the House of Representatives in 18 out of 20 midterms, or 90% of the time. The president’s party has also lost control of at least one chamber of Congress 45% of the time.

However, for investors the significance of the midterms extends beyond the results. The election has removed one source of uncertainty from the equity markets, but recent equity market volatility is a reminder that other questions remain. We continue to assess these moves against the underlying economic and corporate fundamentals, which remain resilient.

Historically, the resolution of midterm election uncertainty has tended to be supportive for equities. Since 1946, the S&P 500 has returned an average of 1.7% in the three months ahead of midterm elections, with positive returns 62% of the time. In the three months following the elections, the average return has been 7.5%, with markets positive 90% of the time.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.

The complication in 2026 is that the midterms were only one source of uncertainty. Questions around artificial intelligence (AI) investment, interest rates, energy markets and geopolitics will remain long after the ballots have been counted.

Last week’s stock market falls, accompanied by a shift in investors’ focus from AI-related stocks towards more defensive areas such as healthcare, consumer staples and utilities, provide the immediate backdrop to those longer-term questions.

AI’s political challenge will outlast the election

In our opinion, AI remains the defining investment theme of this decade. But its continued expansion depends on more than advances in software and computing power alone.

New data centres require electricity, land, grid connections and considerable physical infrastructure. That is prompting concerns about electricity prices, power availability and the effect of large developments on local communities. And these concerns extend across the political divide.

The National Conference of State Legislatures has identified 16 US states where bills proposing restrictions or moratoria on data centre development have been introduced, although several have subsequently failed or been vetoed. Of those states, nine voted Democrat in the 2024 presidential election and seven Republican, a 56%/44% split.

For investors, the distinction is one of degree rather than direction. Democrats may favour greater scrutiny of data centre development at the margin, but concerns around permitting, power availability and infrastructure are bipartisan. The cost of expanding data centre capacity was therefore likely to rise irrespective of the election result.

Middle East remains in focus

The balance of power in Congress matters particularly for domestic policy. With the Democrats taking control of Congress in January 2027, President Trump could potentially find it more challenging to advance parts of his domestic agenda.

Foreign policy is different. While the president’s domestic agenda is more constrained by Congress, he has considerably greater latitude internationally. That distinction has mattered for investors this year, with President Trump’s foreign policy agenda proving more consequential for markets than his domestic programme.

Further disruption in the Middle East, therefore, remains a risk worth watching.

However, there are reasons to believe that the global economy remains better equipped to absorb ongoing oil disruption than in previous decades. Energy intensity has fallen materially, meaning substantially more economic output is now generated for every unit of energy consumed. The US has also become far more energy self-sufficient as a major crude-oil producer and exporter.

We therefore think the US economy remains resilient enough to withstand some energy-related disruption, as it demonstrated earlier this year. But renewed geopolitical uncertainty also reinforces the importance of investment portfolio diversification.

Gold, government bonds and liquid alternatives can all play a role in providing portfolio ballast against risks that equities alone may not hedge.

Election clears one uncertainty, but the bigger task remains

The result of the midterm elections has altered the balance of power in Washington and could affect the prospects for tax, spending and regulatory policies.

But for long-term investors, prospects for AI-driven productivity growth and the path of interest rates will continue to be more important. That is why we continue to focus on the fundamentals rather than attempting to position portfolios around individual political outcomes.

The midterms may clear one uncertainty for markets. However, for investors, the bigger task remains the same: separating the political developments that genuinely change the investment outlook from the headlines that will ultimately pass.