Investors can take comfort, as history points to gains for stocks no matter the election outcome.
An analysis by Wells Fargo & Co found that the S&P 500 Index has risen in the 12 months after every midterm election in the post-World War II era.
[NEW YORK] With the US midterm election less than a month away, Wall Street is preparing for a potential stock market under these conditions.
Gridlock has historically provided investors with strong returns.
Under a Republican president and a divided Congress, US stocks have seen an average annual gain of 13.7 per cent since 1950, according to data from Carson Investment Research. This compares to average returns of 8.3 per cent and 4.9 per cent when Congress was controlled by Republicans and Democrats, respectively.
Historically, a divided Congress has also tended to support bond prices, largely because legislative gridlock limits the potential for additional fiscal stimulus like tax cuts. This could benefit sectors such as manufacturing by lowering borrowing costs.
The wild card in this scenario is Trump, whose tariffs and international interventions have triggered significant market volatility without requiring Congressional approval.
Blue sweep
A Democratic takeover of both the House and Senate could potentially trigger a stock sell-off.
This is partly because the party is more inclined to support AI regulations, whether through restrictions on data centres or by establishing rules governing the development of AI models.
Any measures that decelerate the AI boom would likely restrict capital flow to the chipmakers and industrial firms that supply data centres, while reducing the likelihood that tech companies selling AI services will achieve the massive profits that investors currently expect.
Actually passing AI legislation would be difficult. Trump has positioned himself as a proponent of the technology and would likely veto any bill deemed too restrictive.
Democrats are virtually certain to lack the supermajorities required to override his veto. This means what might initially appear as a major victory for Democrats could still result in gridlock. Consequently, this would likely limit the earnings risk for AI bellwethers such as Microsoft and Nvidia.
Nevertheless, Democrats would retain the ability to pressure AI firms through industry investigations and public hearings. Investors might also interpret a Democratic sweep as a signal of the policy direction that will follow once Trump leaves office.
In specific sectors, healthcare might receive a boost if Democrats leverage their position to reverse cuts to Medicaid, the health-insurance programme for low-income Americans. Conversely, defence contractors have already declined due to concerns that the party will more closely scrutinize military spending.
In the bond market, a blue sweep could put downward pressure on prices if Trump, as a lame-duck president, relies more heavily on executive actions, such as implementing new tariffs or escalating geopolitical tensions.
A Democratic victory could also weigh on the US dollar, as market participants anticipate that an AI slowdown would dampen the economic outlook.
However, given other factors supporting the US dollar—including elevated energy prices and expectations that the US Federal Reserve will raise interest rates—the election is unlikely to significantly impact the US$9.5 trillion-a-day foreign currency market.
Red sweep
If Republicans manage to retain control of both chambers of Congress—an outcome polls suggest is unlikely—the current favourable environment for AI stocks should remain intact, according to analysts.
“Status quo would not be a bad thing per se,” Manulife John Hancock Investments strategist Matt Miskin said. It could spark a rally in financial and industrial stocks closely tied to the broader economy, as investors bet that Republicans will act to stimulate growth.
However, that growth could drive borrowing costs higher, potentially slowing economic expansion and the stock market as well.
