U.S. Midterm Elections - Probable Outcomes

The U.S. Midterm elections are today. In advance of the results, we want to provide an update on how a political shift in Washington might impact the markets, and your portfolio.

What Are Midterms? They occur halfway through a U.S. president's four-year term, when voters elect the entire House of Representatives and about a third of the Senate. They matter for policy areas like taxes, spending, and regulation.

Likely Outcome: The betting markets are pricing in roughly a three-in-four chance of a Democratic sweep, with Democrats heavily favoured to take the House and increasingly favoured in the Senate. However, polling errors and uncertainty in several competitive Senate races leave room for a divided Congress.

Probability of the three overall scenarios:

Democratic sweep (House and Senate): Approximately 73–76% according to prediction markets.
Divided Congress (Democratic House, Republican Senate): less likely but possible.
Republican control of both chambers: A low-probability scenario based on current forecasts.

What would a Democratic sweep tell us? It could signal three things:

Voter dissatisfaction: A strong reaction to the administration's performance, potentially reflecting concerns about broken promises, affordability, inflation, immigration, tariffs, and the economy.
A shift in political momentum: Democrats would gain leverage heading into the 2028 presidential election.
A check on presidential power: Democrats would have greater ability to investigate, scrutinize and challenge the administration's policies.

As discussed in our October Monthly Update and podcast which you can listen to here, our partners at Fidelity Investments provided a great commentary on the upcoming midterms. Please find below the link to watch the video. We have also summarized the key takeaways below:

U.S. Midterms Made Simple: True or False with Denise Chisholm

Key Takeaways & Myths Debunked

Markets perform better under one political party than the other (False): Historical returns vary, but when controlling for variables like recessions or focusing on long-term horizons, the market performs similarly under both Democratic and Republican presidents.
Gridlock in Washington is bad for markets (False): Historically, markets tend to experience higher average returns and better odds of advancing under a divided government rather than unilateral power.
Earnings matter more than elections (True): Corporate earnings and underlying valuation starting points are far more critical drivers of stock performance and secular bull markets than the political party in power.
The worst part of the cycle is often before the election (True): The first two years of a presidential term typically see below-average returns due to policy uncertainty. However, looking at midterms specifically, the S&P 500 has historically posted a 100% positive hit rate in the calendar year following midterm elections going back to the 1930s.
Investors pay too much attention to elections (True): Headlines cause investors to overemphasize political events, whereas fundamental factors like earnings and market starting points typically dwarf the impact of presidential cycles

The Bottom Line: While headlines during election season can generate noise and short-term volatility, political events rarely alter the underlying, long-term trajectory of the markets. Staying disciplined and focused on corporate fundamentals and individual financial goals remains the best strategy.

Please feel free to reach out if you have any questions or if you'd like to review your current portfolio strategy together.

Thank you for your continued partnership.