With the midterm elections approaching Tuesday, investors are weighing whether a shift in congressional control could alter the policy landscape, complicate fiscal policy and budgetary negotiations or introduce new risks for financial markets.
Democrats are favored to win a majority of seats in the House of Representatives, while control of the Senate remains more competitive. Either outcome could produce divided government for the final two years of President Donald Trump’s term, limiting the administration’s ability to move legislation through Congress. But the consequences could extend beyond legislation, affecting congressional oversight, federal appointments and negotiations over government funding and the debt ceiling.
“One underappreciated dynamic of a Democratic sweep is the potential implications for monetary policy,” says Jeff Schulze, head investment strategist at the Franklin Templeton Institute. If Democrats were to control the Senate, then Democrats “would control the confirmation process for potential new candidates, and if you do see [former Chairman Jerome] Powell, [or Fed Governor] Lisa Cook, leave the Fed, that’s going to be a very difficult process to get people onto the Federal Reserve” Board of Governors.
Still, several asset managers have cautioned against treating the election as a decisive signal for broad markets. Morgan Stanley, in a report, argued that inflation, economic growth and corporate earnings are likely to have a greater influence on market performance than the composition of Congress. Even under divided government, the administration could continue pursuing policies related to trade, immigration, deregulation and foreign affairs through executive actions and federal agencies.
Divided Congress: Best for Returns?
Investors have often welcomed divided government on the assumption that legislative gridlock reduces the likelihood of major changes to federal taxes, spending and regulation.
A report from Capital Group found that the S&P 500 has generated double-digit average annual returns under different control scenarios, including a unified government, a split Congress and periods when Congress was controlled by the opposition party. Since 1933, the index returned an average of 14.5% under unified government, 11.7% when Congress was controlled by the opposition party and 13.8% under a divided Congress, according to the asset manager.
“However, past performance does not guarantee future results. And equities have already performed better in 2026 than in the typical second year of a presidential term, potentially leaving less room for gains after the midterms,” the Morgan Stanley report stated.
Schulze added, “you have some historical precedent where the president’s party usually loses seats in the House in the midterms, and then also the president has a low approval rating. We think that a divided government is a good base case, but a divided government may not be the best market outcome.”
Shulze notes that a Democrat-controlled House with a slim majority and Republican control of the Senate could result in continued brinkmanship. Congress is “going to have the debt ceiling come into question, potential government shutdowns, and that could lead to decreased animal spirits and more uncertainty.”
If Democrats take either chamber, the leadership of committees there could switch from the current chairs to the top-ranking Democrats on those panels. In the House, one of the biggest changes for federal financial and tax policy would be the elevation of Representative Richard Neal, D-Massachusetts, to lead the House Ways and Means Committee, taking over from Chairman Jason Smith, R-Missouri.
On the House Financial Services Committee, Representative Maxine Waters, D-California, could be expected to take over the chairmanship from Representative French Hill, R-Arkansas, the current committee leader.
And for the House Committee on Appropriations, which is responsible for all federal spending bills, Representative Tom Cole, R-Oklahoma, would pass the gavel to Representative Rosa DeLauro, D-Connecticut.
Tags: elections