Midterms & markets

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   By Guest Blogger Ryan Lewenza

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Today I’m going out on a limb, predicting the Democrats are going to smoke the Republicans in next Tuesday’s U.S. midterm elections. Get your popcorn ready, because it’s shaping up to be a long night, particularly for Republicans. My call is that they’ll lose control of both the House and the Senate.

In the House, Republicans currently hold a narrow 218-214 majority, meaning Democrats need to pick up just four seats to regain control. The Senate is a tougher climb, with Republicans holding 53 seats compared to 45 for Democrats. However, when you include the independents who typically caucus with the Democrats, the party would need a net gain of four seats to reach 51 and take control of the chamber.

From my perspective, it’s already baked into the cake that Democrats will regain control of the House. The Senate, however, looks much closer to a coin toss. The key battleground states to watch, which will likely determine whether Democrats also take back the Senate, are North Carolina, Alaska, Ohio, Maine, and even Texas. In Texas, there’s a realistic chance that James Talarico could defeat Ken Paxton, which would result in the state’s first Democratic senator since 1988.

So why am I calling for both the House and Senate to flip?

First, history is not on the Republicans’ side. One of the most reliable patterns in U.S. politics is that the president’s party tends to lose ground in the midterm elections. In 37 of the last 41 midterms, the party occupying the White House lost seats in the House of Representatives, with an average loss of roughly 31 seats. If that historical trend holds, Republicans could be facing a significant uphill battle, and the Democrats very likely will take control of the House, and possibly the Senate.

Second, many Americans simply aren’t very happy with President Trump right now. Concerns over several of his policies, what some perceive as a greater focus on renovating the White House rather than addressing the issues affecting everyday Americans, his decision to go to war with Iran, and persistently high energy prices, with gasoline still above $4 per gallon and diesel hovering around $6.50, have all weighed on public sentiment.

As a result, Trump’s approval rating is currently sitting in the 30% range, putting it among the weakest approval ratings for a sitting president heading into a midterm election in decades. In fact, you have to go all the way back to 1946, when Harry Truman occupied the White House, to find a president entering a midterm with approval numbers this low.

Adding to the challenge, several key voting blocs that helped propel Trump to victory in the presidential election, including Hispanics, independent voters, and younger Americans, appear to be drifting away. That erosion of support among these critical voter groups helps explain why Trump’s approval ratings have fallen to their lowest levels and could prove to be a major headwind for Republicans in the midterms.

President Trump’s approval ratings are in the tank

Source: Nate Silver

Third, the prediction markets are also leaning heavily in the Democrats’ favour. Kalshi currently puts the odds of Democrats taking back the House at roughly 91%, while giving them about a 65% chance of reclaiming the Senate. Prediction markets aren’t perfect, but they do provide a useful real-time gauge of investor and voter sentiment because the people making these bets have actual money on the line.

Put it all together and the case for a Democratic sweep becomes pretty compelling: history is working against the Republicans, Trump’s approval ratings are in the tank, key voting blocs are drifting away from the president, and the prediction markets are increasingly pointing to a change in control. That’s why I’m calling for both the House and Senate to flip next week.

How this vote may affect your portfolio

Now, what are the investment implications if this actually happens?

Historically, markets have tended to perform well under divided governments. The thinking is fairly straightforward: when power is split between the White House and Congress, it becomes much more difficult to pass major legislation, reducing the risk of significant policy changes that could disrupt businesses or financial markets.

Looking at the historical record, midterm elections that resulted in a Republican president facing a Democratic-controlled Congress have generally been positive for equities. Since 1930, the S&P 500 has delivered average gains of roughly 15% in the 12 months following those election outcomes. By contrast, periods with both the White House and Congress under Republican control have produced much weaker returns on average. Interestingly, when Congress itself is divided, market performance has been even stronger, with average gains approaching 23%.

The bottom line is that markets tend to like gridlock. A divided government limits the likelihood of major tax, spending, and regulatory changes, creating a more predictable environment for businesses and investors. So, if Democrats take control of one or both chambers next week, it could ultimately be welcomed by Wall Street.

Final point, regardless of what happens on Tuesday, I see the potential for markets to rally into November and December as election uncertainty begins to fade. Historically, the fourth quarter of U.S. midterm election years has been one of the strongest periods for equities. As the chart below illustrates, the S&P 500 has often posted solid gains in the final months of the year, with much of that strength coming after Election Day in November.

Looking further out, the historical track record is even more impressive. Going back to 1962, the S&P 500 has been higher six and 12 months after every U.S. midterm election. While history is never a guarantee of future results, it does suggest that markets tend to respond favourably once the uncertainty surrounding the election is removed.

So, barring a major surprise from left field, such as a significant escalation in the conflict with Iran or another unforeseen geopolitical shock, I believe stocks could continue trending higher over the coming months regardless of which party comes out on top next Tuesday. For investors, the bigger story may not be who wins the election, but rather the fact that we’ll finally have clarity on the outcome.

S&P 500 average quarterly returns in U.S. mid-term election years

Source: Bloomberg, Turner Investments

S&P 500 returns 6 and 12 months after U.S. mid-terms

Source: Bloomberg, Turner Investments. Click to enlarge.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/10/31/midterms-markets/