US Midterms 2026: Democrats take control of Congress

US midterm election results suggest a divided government, which should ultimately be positive for equities. Historically, the 12 months following midterms have seen an average 14% S&P 500 return, a trend driven by incumbent parties championing pro-growth policies and legislative gridlock reducing investor uncertainty. We expect this pattern to hold, even with potential near-term volatility.

Liquidity investors should focus on the Federal Reserve, not Congress. A divided government typically favors bonds, but Fed policy remains the primary driver for cash markets. The market anticipates a quarter-point rate hike in December, pushing the fed funds target to 4.00-4.25%, with further tightening likely in 2027.

A Democratic-controlled Congress may also lead to increased regulation of AI. This could slow data center build-out, potentially dampening growth and profits for risk assets. Conversely, slower inflation and growth stemming from AI constraints could benefit bonds. However, the extent of fiscal policy changes remains uncertain.