US midterm election results have historically been favorable for stocks regardless of which party wins, but some Wall Street strategists are urging clients to temper their bullishness this time around. Concerns include a possible corporate earnings slowdown from tougher federal and state oversight of the artificial intelligence industry by newly empowered Democrats, along with elevated interest rates.
Historical analogs are less bullish than they appear. Periods with a Republican in the White House and Democrats controlling both houses of Congress have been among the weakest for equity returns, with the S&P 500 averaging an annual gain of just 4.9% since the early 1950s, according to Carson Investment Research data. Lori Calvasina, head of US equity strategy at RBC Capital Markets, said the track record for this type of divided government "is not as good." A split Congress with a Republican president has typically been more favorable, with the index rising 14% annually.
For now, the removal of election uncertainty appears to be prompting investors to buy the pre-election dip. The S&P 500 had fallen 3.2% from its last record on Oct. 6, while the tech-dominated Nasdaq 100 dropped almost 10% over the same period. JPMorgan's Market Intelligence desk, led by Andrew Tyler, said the index is more likely to advance than decline after the midterms because President Donald Trump holds veto power, making it difficult for Democrats to enact AI restrictions without a veto-proof majority.
History also supports a post-election lift. One year after every US midterm since 1950, the S&P 500 finished higher with an average gain of 15%, according to Jeffrey Hirsch, editor of the Stock Trader's Almanac. One month after the vote, the index rose nearly 79% of the time. Hirsch noted that with the election outcome known, investors have a clearer political landscape to assess. The path is not always smooth, however. In 2018, the S&P 500 initially rose 2.1% the day after a divided-government midterm, but was 2.2% lower a month later and finished the year down 6.2% after the Federal Reserve raised rates four times.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing