The U.S. midterm elections on November 3, 2026, are drawing closer, along with the question of what impact a shift in power balance in Congress could have on financial markets. Prediction markets currently see the Democrats with the edge. A Democratic majority in the House of Representatives is now considered likely, and the Democrats are also ahead in the Senate.

Even the pollsters, however, warn that the reliability of surveys has declined. According to them, entire voter groups are now increasingly hostile to being polled, which significantly affects the quality of survey results.

For investors, though, the election outcome is likely to matter less than the question of how monetary policy, inflation, and corporate earnings develop. Short-term moves are possible, but, according to an old stock market saying, political markets have short legs.

"Companies ultimately create value through profits, not through election results."

"We do not expect the midterms to have a meaningful impact on markets - political drama, however, is entirely possible," wrote Mike Bell, Head of Market Strategy at RBC BlueBay Asset Management, in a comment. Markets have already largely priced in a possible Democratic victory in the House and the Senate. Far more important right now are AI investments, inflation, and the reaction of the U.S. Federal Reserve (Fed).

Michael Heldmann, CIO Equity at Allianz Global Investors, also warns against overestimating the influence of political events. In his view, the midterms are unlikely to mark a decisive turning point for financial markets. Rather, they could lead to shifts between individual sectors and investment styles. "However, the fundamental drivers of returns will remain interest rates, earnings growth, and the further development of the AI investment cycle," Heldmann emphasizes.

Interest rates and corporate earnings in focus

Monetary policy, in particular, is likely to remain central for equity markets. The key issue is whether inflation proves sticky and the Fed adjusts its policy stance accordingly. Rising inflation expectations could push up yields on U.S. government bonds further and thus weigh on equity valuations.

The headquarters of the U.S. Federal Reserve in Washington, D.C. (Image: Federal Reserve)

Falling yields, by contrast, would benefit growth-oriented companies in particular, whose valuations depend more heavily on future expected earnings.

According to Heldmann, the influence of the elections on markets therefore depends mainly on whether expectations for inflation and interest rates change as a result. At the same time, the upcoming earnings season should provide important clues about companies' economic health. In addition to current results, investors will pay particular attention to comments on demand, investment plans, and the expected returns from AI applications.

"Companies ultimately create value through profits, not through election results," Heldmann says. Strong earnings could underline market resilience regardless of the political outcome. Disappointing results, however, could make investors react more sensitively to political news.

AI investments as a key market driver

The investment cycle around artificial intelligence plays a particularly important role here. High expectations for the expansion of data centers, demand for semiconductors, and new software applications have significantly shaped the performance of numerous stocks. Whether the substantial investments will pay off in corresponding returns over the long term is therefore likely to be an important factor for further market development.

"The economic outlook is more important for markets than the midterms."

At the same time, political changes could have implications for AI regulation. Stricter regulatory oversight could affect individual companies' investment plans and earnings expectations. For Heldmann, therefore, not only the scale of investment matters, but also the question of what returns can actually be achieved with it.

Bell also sees little reason to view the midterms as a dominant market factor. "The economic outlook is more important for markets than the midterms," he says. Alongside AI investments, inflation, the labor market, and the Fed's response are likely to set the tone. Changes in U.S. foreign policy could also trigger stronger market moves than the composition of Congress.

A Democratic election win could affect fiscal policy

That said, the election outcome is not entirely insignificant. A Democratic majority in both chambers of Congress could limit President Donald Trump's room for maneuver and change negotiations over government spending. While Republicans tend to support higher defense spending, Democrats are likely to push more strongly for additional social spending.

Raphaël Gallardo, chief economist at Carmignac, points out that such a constellation could also affect the budget deficit and bond yields. Additional, unfunded spending would further increase government debt and financing needs. Together with rising inflation expectations, this could put particular pressure on long-term U.S. government bond yields.

According to Gallardo, however, the party affiliation of the political majority matters less than the basic direction of fiscal policy. Under both Democratic and Republican leadership, additional government spending could remain on the agenda. A more expansionary fiscal policy would support nominal economic growth, but could also push up long-term bond yields.

Alex Rohner, Fixed Income Strategist at Bank J. Safra Sarasin, in turn expects the U.S. economy to remain robust over the next six to twelve months and the Fed to continue raising interest rates regardless of the election outcome. A Democratic victory could strengthen the central bank's independence and tend to favor U.S. government bonds. However, Rohner does not expect a fundamental reversal in economic policy.

A divided Congress would also have advantages

Afonso Borges, Fixed Income Research at Julius Baer, sees a possible split majority in the Senate and the House of Representatives as an advantage. "A Democratic-controlled House of Representatives would prevent further fiscal and regulatory legislation along party lines. However, the government would still retain broad room for maneuver through presidential decrees in the areas of trade, immigration, and foreign policy," Borges explains. That would narrow the range of possible policy outcomes, which supports longer-dated bonds and tends to have a positive effect on stocks as well.

For 10-year U.S. government bonds, a similar pattern could emerge to the one seen after the 2018 midterms, when yields fell after the election. Borges sees a significant risk, however, in the dispute over the debt ceiling, which the U.S. Treasury is likely to reach in 2027. Stalled negotiations could temporarily weigh on financial markets, put pressure on the U.S. dollar, and raise long-term bond yields.

Political headlines, economic fundamentals

Overall, the experts expect the midterms to cause short-term volatility and rotations between individual market segments. They do not expect a lasting change in the broader market trend unless economic conditions change.

For investors, the development of U.S. interest rates, the resilience of corporate earnings, and whether the high investments in artificial intelligence pay off remain the key points to watch. The election outcome is likely to matter most where it has concrete effects on fiscal policy, regulation, or inflation expectations.