From MFS Investment Management
Key Insights:
- Potential gridlock may be viewed positively by markets, as legislative constraints can reduce policy uncertainty and limit large fiscal swings.
- At the margin, the changing political landscape may influence sector performance.
- Next year’s debt ceiling and budget negotiations are likely to be fraught, while AI regulation could be a contentious issue.
- Rather than positioning around a political outcome, use the midterms as an opportunity to confirm portfolios are diversified and aligned with your long-term investment goals.
Following the 2026 US midterm elections, investors are focusing on the potential impacts of the shift in congressional control from Republicans to Democrats.
Though Democrats swept both the House and the Senate, they do not have a veto-proof majority, which suggests legislative gridlock is probable. Without Republican congressional majorities, President Trump may therefore lean more heavily on executive authority in the final two years of his term. As a result, many aspects of current policy could remain in place as a divided government reduces the likelihood of major legislative changes, which could limit fiscal expansion and significant regulatory initiatives.
Markets typically look through political uncertainty
While election-related market volatility is not unusual, history suggests investors should take a longer-term view. Political events often create short-term market swings, but long-term returns have generally been driven by earnings growth, economic fundamentals, and monetary policy. Markets have frequently performed well under a divided government and have historically delivered strong returns following midterm election years. Since World War II, US markets have been higher 12 months after election day in all 20 midterm elections since 1946, with an average gain of 14.4%.[1]
Sector implications under a Democrat-led Congress
- At the margin, clean energy will likely face fewer headwinds.
- In healthcare, hospitals and healthcare providers could benefit from the reduced probability of cuts to Medicaid.
- The defense sector could face new headwinds, as Democrats might shift the Trump administration’s priorities.
- The energy industry could face stricter congressional oversight.
- The drive to reshore US manufacturing enjoys bipartisan support, so industrials, semiconductors, and electrical equipment manufacturers likely will not face increased congressional roadblocks.
- AI privacy is a Democratic priority, as is the community impact of data centers. Expect modest headwinds for the industry.
- Datacenter construction may face additional headwinds at the state level given Democratic wins in key gubernatorial races.
Potential flashpoints
Despite expected gridlock, unless Republican lawmakers pass another reconciliation bill before the current Congress ends, there will be no avoiding must-pass legislation over the next two years, which could raise the political stakes.
Contentious issues include government appropriations, raising the debt ceiling and dealing with the looming Social Security deficit, and, perhaps most contentiously, funding for the war in Iran. The regulation of AI will likely also be hotly debated in a Democratically controlled Congress and could be a sticking point given the Trump administration’s relatively light-touch regulatory regime.
[1] 1 Deutsche Bank Chart of the Day: The Ballot and the Bull, November 3, 2026.
