Key Takeaways
- • Democrats are favored to win a House majority in the November 2026 midterms, while Senate control remains more competitive, with either outcome potentially producing divided government for the final two years of President Trump's term.
- • Capital Group found the S&P 500 returned an average of 14.5% annually under unified government, 11.7% when Congress was controlled by the opposition party, and 13.8% under a divided Congress since 1933.
- • Morgan Stanley argues inflation, economic growth and corporate earnings will likely matter more for markets than the composition of Congress, and notes equities have already outperformed the typical second year of a presidential term in 2026.
- • Franklin Templeton Institute's Jeff Schulze flags Senate confirmation power as a key monetary policy risk if Powell or Governor Lisa Cook depart the Federal Reserve.
- • Committee leadership would shift to Democrats in either chamber that flips, with Richard Neal positioned to lead House Ways and Means and Maxine Waters to lead House Financial Services.
Summary
With the midterm elections approaching on Tuesday, investors are assessing whether a change in congressional control could alter the policy landscape, complicate fiscal and budget negotiations, or introduce new risks for financial markets. Democrats are favored to win a majority of House seats, 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 advance legislation. Consequences could extend to congressional oversight, federal appointments, and negotiations over government funding and the debt ceiling.
Jeff Schulze, head investment strategist at the Franklin Templeton Institute, described the monetary policy implications of a Democratic sweep as underappreciated. He noted that if Democrats controlled the Senate, they would oversee the confirmation process for new Federal Reserve candidates, which could make filling any vacancy left by former Chairman Jerome Powell or Governor Lisa Cook a difficult process.
Several asset managers caution against treating the election as a decisive signal for broad markets. Morgan Stanley argued in a report that inflation, economic growth and corporate earnings are likely to exert greater influence on performance than the makeup of Congress. Even under divided government, the administration could continue pursuing trade, immigration, deregulation and foreign policy objectives through executive actions and federal agencies.
Investors have often welcomed divided government on the assumption that gridlock reduces the likelihood of major changes to federal taxes, spending and regulation. Capital Group found the S&P 500 has generated double-digit average annual returns across control scenarios since 1933, returning 14.5% under unified government, 11.7% under opposition-controlled Congress, and 13.8% under a divided Congress. Morgan Stanley cautioned that past performance does not guarantee future results and that equities have already outperformed the typical second year of a presidential term in 2026, potentially leaving less room for gains after the midterms.
Schulze said a divided government is a reasonable base case but may not be the best market outcome, citing the usual midterm seat losses by the president's party and the president's low approval rating. He warned that a Democrat-controlled House with a slim majority alongside a Republican Senate could produce continued brinkmanship over the debt ceiling and potential government shutdowns, which could dampen business sentiment and increase uncertainty.
Leadership changes would follow if Democrats win either chamber. In the House, Representative Richard Neal (D-Massachusetts) would likely replace Chairman Jason Smith (R-Missouri) at Ways and Means, a significant change for federal financial and tax policy. Representative Maxine Waters (D-California) would be expected to succeed Representative French Hill (R-Arkansas) at Financial Services, and Representative Rosa DeLauro (D-Connecticut) would replace Representative Tom Cole (R-Oklahoma) at Appropriations, which oversees all federal spending bills.
Jeff Schulze, head investment strategist at the Franklin Templeton Institute, described the monetary policy implications of a Democratic sweep as underappreciated. He noted that if Democrats controlled the Senate, they would oversee the confirmation process for new Federal Reserve candidates, which could make filling any vacancy left by former Chairman Jerome Powell or Governor Lisa Cook a difficult process.
Several asset managers caution against treating the election as a decisive signal for broad markets. Morgan Stanley argued in a report that inflation, economic growth and corporate earnings are likely to exert greater influence on performance than the makeup of Congress. Even under divided government, the administration could continue pursuing trade, immigration, deregulation and foreign policy objectives through executive actions and federal agencies.
Investors have often welcomed divided government on the assumption that gridlock reduces the likelihood of major changes to federal taxes, spending and regulation. Capital Group found the S&P 500 has generated double-digit average annual returns across control scenarios since 1933, returning 14.5% under unified government, 11.7% under opposition-controlled Congress, and 13.8% under a divided Congress. Morgan Stanley cautioned that past performance does not guarantee future results and that equities have already outperformed the typical second year of a presidential term in 2026, potentially leaving less room for gains after the midterms.
Schulze said a divided government is a reasonable base case but may not be the best market outcome, citing the usual midterm seat losses by the president's party and the president's low approval rating. He warned that a Democrat-controlled House with a slim majority alongside a Republican Senate could produce continued brinkmanship over the debt ceiling and potential government shutdowns, which could dampen business sentiment and increase uncertainty.
Leadership changes would follow if Democrats win either chamber. In the House, Representative Richard Neal (D-Massachusetts) would likely replace Chairman Jason Smith (R-Missouri) at Ways and Means, a significant change for federal financial and tax policy. Representative Maxine Waters (D-California) would be expected to succeed Representative French Hill (R-Arkansas) at Financial Services, and Representative Rosa DeLauro (D-Connecticut) would replace Representative Tom Cole (R-Oklahoma) at Appropriations, which oversees all federal spending bills.
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