A ‘Blue Tsunami’ changes the balance of power in Washington

Greater legislative constraint should not be mistaken for political calm.

The immediate aftermath of the election could remain unsettled if results are contested or lead to legal challenges, demonstrations or a broader political confrontation. Markets may also face periodic tension over budget negotiations, government shutdowns and the US debt ceiling.

Foreign policy is another area where Congress may have less influence over the direction of events. Developments involving Iran and Ukraine could continue to generate uncertainty, while further changes to US trade policy or tariffs remain possible.

These risks could produce bouts of market volatility. Once the immediate election uncertainty fades, however, divided government should lower the likelihood of sudden, far-reaching changes in domestic policy.

Attention is then likely to return to the forces with a more lasting influence on markets: inflation, Fed policy, economic growth, corporate earnings and the continuing investment cycle around AI.

We see the election result as mildly negative for US equities in the very near term. Initial market reactions have reflected concerns about the reduced prospect of further fiscal expansion, alongside potential regulatory headwinds for AI.

Those concerns do not change our broader investment view over the medium term. Political gridlock has historically reduced the probability of substantial policy change and may give companies and investors a clearer basis on which to plan. We therefore maintain our slight overweight position in equities, with an emphasis on quality businesses and resilient earnings.

For US government bonds, the result looks mildly positive. Democratic control of Congress should reduce the likelihood of another large fiscal expansion and therefore some of the pressure for further increases in government debt. Inflation and monetary policy, however, will remain more important influences on bond yields. We continue to hold a slight overweight position in US Treasuries, providing income and diversification within portfolios.

The immediate impact on the US dollar also looks mildly negative, with the currency trading slightly weaker against the euro and sterling at the time of writing. We nevertheless retain our view that it will move broadly sideways over the coming months.

Markets are unlikely to wait until the new Congress takes office on 3 January 2027 before reacting to the changed political landscape. And if history is any guide, the period following the midterms has often been a favourable one for US equities.

In our analysis of comparable periods since 1970, four of the six strong midterm years were followed by another positive year. The third year of the US presidential cycle, which will be 2027 in the current one, has also historically been the strongest year for the S&P 500. An even longer analysis of Wall Street’s trajectory following the weeks after midterms reveals a positive average performance into year-end.

Wall Street has typically gained through year-end following midterm elections

Source: In-house research, Bloomberg. Past performance is not a reliable indicator of future results.

History is a useful reference point rather than a forecast. Each election takes place against a different economic and geopolitical backdrop, and past performance cannot tell us what markets will do next. But it reinforces our broader view that the midterms themselves are unlikely to determine the investment outlook. Ultimately, we believe economic growth, inflation, interest rates and earnings will matter more than Washington.