Market Takeaways After the Midterm Elections

On Nov. 3, voters elected a Democratic majority to both chambers of Congress. Elections can feel a bit disconcerting, especially when control of Congress changes hands, and investors wonder how this shift will impact policy moving forward.

We are not making portfolio changes based on the election result because our investment decisions are grounded in data, not emotion. Our systematic investment process leads us to make changes when a trend is confirmed and when opportunities present themselves.

Here’s what we anticipate in 2027 and beyond:

• History suggests markets tend to improve once the election is behind us, though returns under divided government have been more modest on average.
• Fiscal and monetary stimulus is fading, so economic conditions are likely to tighten.
• Tax rates are unlikely to change before 2029 because the Democratic majority falls short of the votes needed to override a presidential veto or break a Senate filibuster.
• Policy impact could be concentrated in specific sectors, which favors diversification over big bets and a tactical approach.

Reduced uncertainty has historically been followed by stronger returns.

Midterm years are often hard on stocks. On average, the S&P 500 has fallen about 18% at some point during a midterm year, and in 2026 the pre-election pullback was milder than usual, at about 9%. Performance has typically improved once the vote is in. Since 1938, the S&P 500 has not declined in the 12 months following any midterm election, and the average gain over those periods has been about 19%.^[1]

Historically, investors who stayed invested through the midterm period were rewarded the following year. That is why we believe now is not the time to step away from a financial plan or move to cash.

• Political swings are now the norm. Voters have removed the party in power in 10 of the last 11 elections, the most volatility since Reconstruction.^[2]
• Goals-based investing is a solid foundation. Policy will likely keep shifting every two years, and a plan built around your goals, not around election results, is what holds up through those cycles.
• The same is true for private investments. Private capital funds typically run for 10 to 12 years, spanning three to four administrations and five or six Congresses. One election is a single data point over the life of these investments.

What a Democratic Congress could mean for markets

Modest expectations for S&P 500 returns. Since 1933, a Democratic Congress paired with a Republican president has produced the average annual S&P 500 return of 8.2%.^[3]

• Earnings, inflation, and the Federal Reserve (the Fed)’s monetary policy matter more than which party controls Congress. Companies' profits drive stock prices over the long run, and inflation and the Fed's interest rate policy determines what investors pay for those profits. Election results tend to change the outlook only at the margin.

Fading stimulus. The economy enters 2027 on solid footing, but with less support. There has not been a recession in the third year of a presidential term since at least 1928, and earnings growth is unusually strong.

• The roughly $600 billion in fiscal and monetary stimulus that cushioned 2026 is expected to drop to about zero in 2027. Conditions are likely to tighten, which is a reason to stay disciplined rather than chase risk.

Tax rates are locked in, for now. Based on projections as of Nov. 4, Democrats are projected to hold 54 Senate seats to Republicans’ 44, with Mississippi and Alaska still uncalled, and are projected to hold 258 House seats. That falls short of the 60 Senate votes needed to break a filibuster and the two-thirds majorities (67 Senate seats and 290 House seats) needed to override a presidential veto.

• Rolling back the 2025 tax law would need the President’s signature, so current rates are unlikely to change before 2029.
• For investors in high tax brackets seeking bond exposure, we continue to favor municipal bonds.
• The 2028 election is the next real test for tax policy.

Policy impact concentrated in specific sectors. The new Congress could help some sectors and pressure others, which favors portfolio diversification over big bets and a tactical approach.

• Sectors that could benefit include healthcare and life sciences, utilities and renewables, and companies tied to food assistance and Medicaid.
• Sectors that could face pressure include data center and AI infrastructure, if the 100% capital expensing introduced in 2025 is targeted. Credit card issuers could also be affected if Congress caps interest rates or limits the fees stores pay each time a customer uses a card.
• State elections matter too. Voters in many places worried that data centers would raise electricity bills and use too much land, and some new governors may make them harder to build. Still, demand for AI keeps growing. We expect investment to continue, with more of it going to states that welcome it, have simpler rules, and have enough power.
• Affordability was a defining issue. The cost of gas, groceries, and housing weighed on voters, and one Congress won’t fix it. We see long-term opportunity in investments such as workforce housing that seek to address these concerns directly.

Outlook

Next, we are watching the budget and debt ceiling debate, expected around February 2027, which is likely to bring noisy headlines. We will take action based on our systematic investment process, not politics, when a trend is confirmed and opportunities present themselves.

Have questions about what this means for your portfolio? Please don’t hesitate to reach out to your Balentine relationship manager.

^[1]Source: Bloomberg and Balentine
^[2]Source: Strategas
^[3]Source: Bloomberg and Balentine

_{Balentine LLC (“Balentine”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Balentine’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.    The opinions expressed are those of the Balentine Investment Team. The opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational use only and should not be considered investment advice specific to your financial situation.}