The US midterms: Three outcomes that could reshape markets

On 3 November, Americans will head to the polls in an election that could change the balance of power in Washington.

For investors, however, the important question is not simply which party wins, but which policies the next Congress can realistically influence – and which risks will persist regardless of the outcome.

The election is a catalyst, not the investment thesis

Investors often assume elections determine market direction. In practice, economic growth, inflation, interest rates and corporate earnings usually matter more.

Historically, US shares have delivered stronger returns after midterm elections, partly because the results remove a source of uncertainty.

According to JPMorgan Asset Management’s Guide to the Markets, the S&P 500 has returned an average of approximately 13% in the 12 months following US midterm elections. When a Republican president has faced a divided Congress, the index has historically gained about 23% over the subsequent year.

However, each election takes place against a different backdrop. Current valuations and earnings expectations remain important factors.

Scenario 1: Republicans retain Congress

A Republican sweep would give Donald Trump the strongest legislative platform for the final two years of his term.

Expectations of lower taxes, lighter regulation and further business incentives could support domestic companies, financial businesses and industries exposed to infrastructure and defence spending.

The risk is that markets price in the positive side of the agenda while underestimating tariffs.

A stronger mandate could make additional tax measures easier to pass, but it could also encourage a more aggressive trade policy – and this could favour domestically focused companies over those dependent on imported inputs or overseas production.

Regional banks and US-focused service businesses could benefit from deregulation and tax support. Retailers and manufacturers, however, could remain vulnerable if tariffs raise costs faster than they can raise prices.

Scenario 2: Democrats take one chamber

A divided Congress would restrict major new tax and spending legislation, without removing the president’s powers over tariffs, sanctions and foreign policy. Fiscal policy would largely continue on its existing path rather than being rewritten after the election.

Markets may welcome this constraint.

Political gridlock can be frustrating, but it also reduces the likelihood of major legislative surprises. Technology and financial services companies could continue to perform on the strength of their underlying earnings, while Congress would struggle to deliver a major policy reversal.

High-quality companies sold because of political headlines rather than weaker fundamentals could offer attractive entry points.

Scenario 3: Democrats win both chambers

A Democratic victory in both the House and Senate could trigger the sharpest initial market reaction, as investors reassess assumptions about regulation, appointments and government oversight.

Trump would retain the presidency and considerable authority over trade and foreign policy. Congress could, however, block new legislation and intensify scrutiny of executive decisions.

Clean-energy companies could attract renewed interest, although Congress would have limited scope to reverse existing policies comprehensively while Trump remains in office.

Repeated disputes over budgets, investigations and appointments could undermine business confidence without resulting in significant new legislation.

Investors should distinguish between companies facing genuine changes to their future cash flows and those whose share prices are being driven primarily by negative headlines.

Iran remains an inflation risk

Iran is no longer exporting meaningful volumes of crude oil through the Strait of Hormuz. The investment risk, therefore, is not simply the loss of Iranian supply, but Iran’s ability to disrupt the movement of oil from other Gulf producers.

The current US naval blockade, which began in July 2026, has already reduced Iranian exports to near zero, while the Strait remains a critical route for energy exports from Saudi Arabia, the United Arab Emirates and Qatar.

Even if oil continues to flow, the threat of attacks can drive up insurance premiums, freight charges and security costs. These additional expenses can eventually feed through to fuel prices and squeeze corporate profit margins.

The impact on markets could therefore be significant even without a complete closure of the Strait.

This matters for the election because higher energy costs would complicate either party’s economic agenda.

More expensive fuel would reduce household spending, put pressure on transport and manufacturing companies, and make it harder for the US Federal Reserve to lower interest rates.

Energy exposure can therefore serve as a form of portfolio insurance, rather than simply a bet on the direction of oil prices.

Defence companies and businesses involved in energy infrastructure may offer similar protection, while airlines, logistics groups and highly leveraged consumer-facing companies could be more vulnerable.

The investment conclusion

A Republican sweep could benefit domestic companies through deregulation and tax incentives, but would also increase exposure to tariff risks.

Divided government could limit major legislative changes, although uncertainty over trade and foreign policy would persist. Democratic control of Congress could constrain Trump’s domestic agenda while increasing the potential for political confrontation.

Across all three scenarios, businesses with pricing power, resilient margins, manageable debt and supply chains capable of withstanding tariffs or energy disruptions are likely to be better positioned to navigate uncertainty.

The election will determine who controls Congress. Inflation, oil prices and corporate earnings will shape long-term investment returns.

Samuel Brozin is a portfolio manager at Otto1890.

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