Beyond the ballot box: What the U.S. midterms might mean for markets

Split? Sweep? Status quo? Every seat in the U.S. House of Representatives and roughly one-third of seats in the U.S. Senate are being contested this November. A divided Congress, with Democrats flipping the House and Republicans holding the Senate, is our base case scenario. This outcome would likely push policymaking further toward executive action versus legislation, and heighten risks around budget negotiations, funding deadlines and the debt ceiling — a perennial struggle that will need to be addressed again as early as 2027. Because both political parties have historically added to federal debt to a similar degree, a sweep by either party would potentially produce the largest proposed fiscal spending.

Regarding geopolitical issues, Iran currently has little incentive to negotiate ahead of the U.S. election. That said, if U.S. public opinion against the war — and the surge in oil prices fueling broader inflation anxiety — puts pressure on the Trump administration to forge a hurried deal before Election Day, the terms could end up being more favorable to Iran.

Beyond fiscal policy, inflation and geopolitics, voter decisions could also hinge on concerns about AI broadly and the AI infrastructure buildout in particular. Local opposition to data centers, centered on electricity and water use, have already prompted bipartisan support for building moratoriums and ratepayer protections.

Gauging the possible impacts of Election Day on financial markets. Regardless of the specific election outcome and initial investor response, history suggests that markets typically move back to normal trading patterns relatively quickly after results are known. In fact, equity returns have often been stronger than average over the following year post-election, except during periods of unusual or systemic financial stress. Absent greater bipartisan discipline on budgetary matters, we expect the bond market to remain a marker for fiscal health, especially amid the current selloff in U.S. Treasuries and recent intervention by the Treasury Department to contain rising yields via aggressive debt buybacks.

As for equities, the second year of a presidential term has historically tended to be the weakest for returns, with market volatility peaking ahead of the vote before fading. Figure 1 shows that under a House-flips-to-Democrats/Senate-stays- Republican scenario, the S&P 500 Index has returned +11.95%, on average, over the six months following midterm elections. Over the long term, stock markets have generally risen, sometimes unevenly, regardless of which party holds the reins in Washington, D.C.

Portfolio considerations

Midterm election years tend to bring below-average equity returns and higher market volatility, with the S&P 500 underperforming early in the year compared to a typical nonmidterm year. Moreover, divided or narrow majorities are likely to dampen the prospects for major legislation over the next two years.

We think a split Congress outcome (Democratic House/Republican Senate) would diminish potential consensus and lead to divergence across key areas: a Republican Senate that continues to shield banks and credit cards from rate caps and fee regulation, while promoting defense spending and deregulation, countered by a Democratic House safeguarding life sciences funding and pushing for compromise on infrastructure issues, particularly around rails, broadband and water. Permitting reforms for liquefied natural gas and renewable energy sources may be a point of bipartisan agreement given rising data center power demand. These mixed possibilities reinforce that midterm outcomes are best understood as a sector- and industry-level dynamic rather than a broad market signal.

Historically, midterm elections have not been a reliable signal for bond markets. Over the past 16 midterms, the 10-year U.S. Treasury yield has fallen by an average of more than 30 basis points (bps) in the year after a president’s party lost control of at least one legislative chamber, compared with an average increase of nearly 60 bps when it retained control. The range of outcomes, however, has been wide.

The associated checks and balances implicit in a divided government could be reassuring to bond investors. Tempered expectations for expanded fiscal spending, for example, may ease some pressure on the long end of the Treasury curve. But gridlock would still leave large deficits, and rising government debt could keep upward pressure elevated for Treasury yields.

Beyond Treasuries, our constructive view on corporate credit is supported by resilient economic growth, although higher refinancing costs lead us to be selective in the high yield space. In securitized categories, bouts of rate-driven volatility can create better entry points in areas where underlying fundamentals remain sound. Municipal bonds are more directly exposed to the election through potential tax and spending policy changes, while floating rate credit still offers attractive income. Overall, fixed income assets continue to offer historically elevated yields, which create potentially attractive entry points (Figure 2).

Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

• macro and asset class views that gain consensus among our investors
• insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
• guidance on how to turn our insights into action via regular commentary and communications