With the upcoming midterm election, many investors are asking a familiar question: how will the election results impact the stock market? Historically, while political events can trigger short-term volatility, they are rarely the primary driver of long-term stock performance. For a political outcome to significantly move financial markets, it typically has to result in legislation that directly influences company profits. Because major policy changes are difficult to pass, especially in a divided government, investors may find it more effective to focus on economic fundamentals rather than partisan outcomes.
How do politics impact the stock market?
While political events often dominate the news cycle, they rarely drive long-term stock market performance unless new legislation directly influences corporate profits.
As you think about this upcoming election, ask yourself, how will actual consumers act differently based on the outcome? If the Democrats have a strong night, are people more or less likely to book a trip to a Disney resort? If the Republicans outperform expectations, are people going to run out and buy more sweaters from Target? What about Apple iPhones or Ford F150s or a Dell laptop?
If you approach it this way, you'll quickly realize that election results have little to no impact on these kinds of decisions. If that’s the case, then it isn’t going to matter for company profits, and thus isn’t going to influence the stock price materially.
This isn’t to say that politics is irrelevant, or that there might not be short-term volatility on the days surrounding this upcoming election. However, in the intermediate-term, politics and legislation tends to be a secondary influence on financial markets at best.
Why investors should look past partisan rhetoric
Investors should generally view partisan rhetoric with skepticism, as the U.S. economy is highly dynamic and American companies have historically adapted and thrived across a wide variety of political environments.
Both political parties are always arguing that their policies are best for the economy. In this election, we have candidates from across the country making various arguments about taxes, energy costs, tariffs, regulation, etc. As a citizen, you may have your own preferences. As an investor, you should be skeptical that it will matter either way.
Big companies are used to shifting regimes. They have large legal and compliance teams that help them navigate changes with as little impact as possible. They also use expensive lobbyists to try to blunt the impact of changes on their own industry. Perhaps it might increase the company's costs by some fraction to comply with some new regulation, but the change is almost always so small that it does not have any perceptible impact on share prices.
Watch out for other tactics politicians use to make their argument sound more dire than it is. For example, they throw around big dollar amounts when talking about the impact of some policy. According to the Bureau of Economic Analysis, the size of the U.S. economy is over $32 trillion. $100 million or $10 billion might seem like massive numbers, but they're actually quite small in the scheme of the broader economy.
Which stocks might benefit from the midterm election?
Predicting which specific stocks will benefit from a midterm election is difficult, largely because major legislative changes are hard to pass—especially during periods of divided government.
A lot of things can go wrong when you bet on legislation helping produce stock market winners.
- The political parties aren’t unified in their priorities: In a Presidential election, you have a single individual at least claiming to have certain legislative priorities. This upcoming midterm election is more fragmented. Not only are there hundreds of candidates running individual races, but the national parties aren’t articulating any unified plans for laws they will try to pass.
- Government is very likely to be divided: Most pundits (as well as prediction markets) expect the Democrats to take the majority in the House of Representatives this election. The race to control the Senate is tougher to call. However, this means we are very likely to have Democratic control of at least one branch of Congress, while Republicans will still control the White House. President Donald Trump will be able to veto any Democrat-passed bill, and overriding that veto will be difficult in most cases. This resulting legislative gridlock often means a continuation of the status quo.
- Favorable laws may not have expected effect: Even a law that is obviously favorable toward some industry might not have the effect you expect. On the campaign trail in 2024, President Trump promised more favorable regulation for cryptocurrencies. In addition, he helped pass laws like the GENIUS Act. However, this hasn’t translated into higher prices for coins. This is probably not because the regulatory changes were actually bad for crypto, but rather that other forces were more important.
Hopefully this illustrates how tough it is to make stock market bets on the election. First you have to get the election outcome right, then guess at what gets passed, then correctly forecast how the new laws will impact markets. That’s a lot to get right.
How could election outcomes affect the economy?
Major changes to tax rates and the federal budget can significantly influence the macroeconomy and stock market, but sweeping reforms typically require a level of political unity that is rare in a divided government.
Tax rates and the budget can have a significant influence on the macroeconomy. In the past, when the market started anticipating a major tax cut or a more stimulative budget, that has sometimes caused the market to generally rise. For example, this is probably part of why stocks rose after Trump was elected in 2016. President Joe Biden’s stimulus payments in early 2021 were also likely one of the drivers of strong stock market returns that year.
It would be surprising if anything like that happened in 2026 or 2027. President Trump made a vague promise of $5,000 “dividend” if Republicans win the midterms, but even members of his own party may oppose such payments. Some Democratic candidates are talking about increasing taxes on the rich, although there isn’t much unity around any particular plan.
As we said above, it is very likely that the government is divided between the two parties. Passing anything as big as a major tax reform is going to be extremely difficult. It would take a level of bipartisanship that has been rare in Washington recently. Gridlock and policy continuity is probably more likely than sweeping changes that would impact the stock market in a major way.
The potential impact of AI regulation on tech stocks
While there is bipartisan interest in artificial intelligence (AI) regulation, the potential impact on tech stocks remains fluid, as new rules could benefit certain AI equipment companies while challenging others.
There does seem to be bipartisan agreement that some kind of regulation around AI is needed. Political pressure to act could continue to grow. Data center construction is highly unpopular, Americans are worried AI will destroy jobs, and now there are increasing concerns about AI safety. AI is already a big issue in this midterm election, and could be even more important in the 2028 Presidential election.
Given all this, we expect potential AI regulation to be a major topic regardless of how this election turns out. Unfortunately, predicting the impact of this on stocks is extremely difficult. The parties don’t have well-formed dividing lines around AI, hence we won’t know anything about the direction of regulation simply based on who wins more seats in November. Moreover, some AI companies could benefit from regulation. We wrote an article about AI safety where we pointed out that some safety regulations could benefit certain AI equipment companies and the expense of others.
We think AI regulation is going to be a major theme in the next year, and it could have a material impact on stocks. But what this impact will be is very fluid. We think taking a balanced approach is key. In our view, it is very unlikely that any new regulations will be all good or all bad for AI companies.
Will the mid-term election cause stock market volatility?
Mid-term elections can create short-term market fluctuations, but historical data suggests they are rarely the source of lasting, long-term stock market volatility.
Historically, looking at every midterm election since 1980:
- Short-term stability: The average daily change in the S&P 500 in the two weeks following the election is 0.8%, compared to 0.7% for all days
- Strong intermediate-term returns: The average six-month return post election day is 12.7%, roughly double the average six-month return for all periods of 6.4%.
- Consistent growth: S&P 500 returns have been positive in the every six-month period after a midterm election since 1980.
Big events can create market volatility to be sure. But it is unusual for big well-known events to create lasting volatility. If there is a surprising result, then there could be some short-term fluctuations in stocks. However, we don’t think this would portend additional volatility in the coming months. Any big move in stocks, up or down, will likely be for other reasons - things like AI, interest rates, or the general economy. Market returns are unlikely to be driven primarily by this election in the coming months.
