US Midterms: Could Election Results Spark a Stock Market Surge?

Investors are currently navigating a complex landscape. Rising oil prices, persistent inflation, and increasing interest rates are significant concerns. Adding to this, the technology sector is experiencing volatility due to growing apprehension about an artificial intelligence (AI) bubble. Compounding these issues are the unpredictability of US President Donald Trump, escalating government debt, regional conflicts, and stretched stock valuations, creating a challenging environment.

Now, a new factor emerges: the upcoming US midterm elections on November 3rd. These elections will determine control of Congress and shape the future direction of President Trump's administration. Curiously, historical data suggests a potential positive outcome for the stock market following midterm elections. An analysis by JP Morgan Asset Management indicates that the S&P 500 has historically seen gains in the 12 months subsequent to every midterm election since 1950. The question remains: will history repeat itself?

If this historical pattern holds true, stock market bulls may have reason for optimism, according to Russ Mould, investment director at AJ Bell. He notes, “While the past is no guarantee, the third year of a presidential term is, on average, the best for the US stock market.” Historically, the average gain across postwar presidencies in the third year has been a remarkable 16.1 percent, with no other presidential year averaging a double-digit gain.

One prevailing theory suggests that presidents are incentivized to stimulate the economy in the lead-up to the next election. Another perspective posits that midterm elections often result in a 'lame-duck' president, whose ability to pass significant legislation is diminished, potentially allowing businesses to operate with less governmental interference. Jason Hollands, managing director at Evelyn Partners, explains that markets tend to be volatile before the vote, but once the outcome is known, investors can shift their focus from polling to policy.

Gridlock Could Boost Stocks

If President Trump's party loses control of both the House and the Senate, this outcome could potentially benefit the stock market. Mr. Hollands suggests that a divided Congress would impede the passage of major new legislation, thereby limiting the likelihood of sweeping changes to tax and regulatory policies. However, investors should not necessarily equate divided government with a period of political quietude. Aliasgar Tambawala, co-chief investment officer at Klay Group, cautions that political gridlock can introduce its own set of challenges. “A divided legislature may lead to greater disruptions around issues such as the debt ceiling and government funding,” he warns.

President Trump's executive powers, including the imposition of tariffs, would largely remain intact, and he retains his veto power. Mr. Tambawala anticipates that political volatility will persist. For investors in the GCC region, however, larger concerns loom, particularly the situation in the Strait of Hormuz. He states, “A durable resolution would augur well for the region.”

Despite recent market fluctuations, the S&P 500 and the tech-heavy Nasdaq have seen gains of approximately 12 percent this year, according to Tony Hallside, chief executive of STP Partners. He emphasizes that further growth hinges on corporate earnings. “Getting the election out of the way helps sentiment, but it does not create earnings growth. If inflation persists or profits fall short of expectations, the historical election pattern will offer little protection,” he adds.

AI also presents a significant concern. The question remains whether the technology can justify the substantial investments being made by generating sustainable revenue and profits. “Political clarity will not compensate for disappointing commercial results,” Mr. Hallside points out.

Reality Checks for Investors

Madhur Kakkar, chief executive of Elevate Financial Services, warns that markets face formidable headwinds. Brent crude has reached $117 a barrel, the US Federal Reserve implemented an interest rate hike in September and may consider another in December, and 10-year Treasury yields are approaching 5 percent. “Higher Treasury yields provide investors with a competitive income alternative at a time when US equity valuations remain demanding,” Mr. Kakkar explains. The S&P 500's Shiller price-to-earnings ratio closed October at 40.88, a level surpassed only during the dot-com boom. On October 29, Alphabet shares experienced a significant decline of 13 percent, erasing $500 billion in value, partly due to heavy AI infrastructure spending contributing to a quarterly free cash flow deficit of $9.1 billion.

Nevertheless, the US economy has demonstrated resilience, with third-quarter GDP growing at an annualized rate of 3.4 percent. Mr. Kakkar advises investors to maintain balanced portfolios rather than aggressively pursuing a post-midterm rally.

Vijay Valecha, chief investment officer at Century Financial, believes that AI and interest rates, rather than political developments, will be the primary determinants of market performance towards the end of 2026. “Easing inflation and a successful Anthropic IPO could still fuel a year-end rally,” he suggests. For the GCC region, the economic outlook appears more robust than headline figures might indicate. The IMF projects a contraction in Gulf output of 4.8 percent this year due to the Iran war, followed by a rebound of 9.1 percent in 2027. Saudi Arabia and the UAE are maintaining substantial oil shipments around the Strait of Hormuz, supported by high crude prices that bolster revenues. Non-oil economic activity remains strong, but a full recovery is contingent on the reopening of the strait, which the IMF anticipates will commence in March 2027.

Mr. Mould remains cautious, citing persistent inflation, potential interest rate hikes, the ongoing Middle East conflict, high oil and equity valuations, and the possibility of an AI investment bust. While historical trends suggest the midterms could precede another Wall Street rally, the confluence of numerous risks may lead investors to conclude that, this time, history is indeed irrelevant.