Midterm elections: What a Democratic victory means for stocks

The stock market is not yet pricing in a Democratic victory in Congress — despite some polls and most market predictions pointing in that direction — so that scenario could weigh on stock prices on Wednesday, according to investors and analysts.

Republicans managing to maintain control could spark a near-term recovery, they said.

Short-term movements aside, the typical post-medium term trend in the coming months is bullish. But some wonder whether the market could reverse the positive historical trend this time around, as the S&P500 is already up sharply this year in the run-up to the elections.

As for some stocks to watch, a big Democratic win Tuesday night — particularly in the Texas governor’s race — could fuel a selloff in AI stocks based on the idea that more restrictions on data centers would gain momentum nationwide. Defense stocks could come under pressure due to fears of spending limits.

Polls point to a Democratic victory in the House and a tie in the Senate. Forecast markets have been more favorable to Democrats, calling for a blue sweep.

While investors are signaling “a grudging acceptance” of a base case scenario that there would indeed be a Democratic victory, that’s not how they are positioning themselves, said Tobin Marcus, head of U.S. policy at Wolfe Research. Data from a recent survey the firm conducted of more than 100 institutional investors suggests they are not strongly positioned for any particular outcome.

“Investors appear to have a significant dose of skepticism about whether the final outcome will be as favorable to Democrats as the poll suggests,” Marcus told CNBC, noting that the firm shares the view that “the poll likely overestimates Democratic strength.”

JPMorgan sees a blue wave knocking the S&P 500 down about half a percent on Wednesday.

On the other hand, if Republicans end up retaining both houses of Congress, that could spark a rally, said Sameer Samana, head of global equities and real assets at the Wells Fargo Investment Institute.

“From a certain point of view, the market knows what to do if the Republicans hold both houses,” he said.

Citigroup strategists said Monday that Republicans losing the House but managing to hold on to the Senate could be “a tailwind for stocks through the end of the year.” JPMorgan traders predict up to 1% increase on Wednesday if the Republicans keep this chamber.

Beyond any short-term movements, stocks tend to rally once the mid-term period is over. In fact, the S&P 500 was up a year after every midterm election dating back to the early 1980s.

But the S&P 500 index has already posted double-digit gains in 2026, so some on Wall Street worry that investors are becoming too complacent as this year’s elections approach.

In midterm election years, the S&P 500 Index has typically averaged a 14% decline at some point during the second half of the year, found Jonathan Krinsky, chief markets technician at BTIG.

“The reason stocks often do well in November midterms is that (the S&P 500) is usually weak DURING elections. We have the opposite situation this year,” Krinsky wrote last week. “Therefore, while the consensus is that we are seeing a post-midterm recovery, we believe the opposite is actually more likely.”

The fact that the market as a whole has recently come under significant pressure due to turbulence in AI trading, which has led to the Nasdaq Composite to post Friday its worst day since June. AI shares led the market lower again on Monday.

A strong showing by Democrats in Tuesday’s midterm elections could put even more pressure on trade.

At the state level, increased Democratic control likely poses a hurdle for stocks associated with data centers and technology capital goods, analysts say.

“It (would) reinforce early warning signs in different states about the advancement of AI infrastructure,” Rob Rains of Washington Analysis told CNBC.

Goldman Sachs strategists said this week that a Democratic Congress “could limit data center tax incentives, but a national moratorium seems unlikely on election results.”

An example would be Texas, a key hub for data center construction. A surprise loss by Republican Gov. Greg Abbott has the “potential to spook” the market in the short term, Marcus de Wolfe said.

A blue wave could put pressure on defense stocks, while boosting healthcare stocks, analysts and investors say.

“A substantial Democratic victory could limit real spending growth unless a broader deal increases funding for defense and health care,” said Alex Sagal, global equity analyst at Wells Fargo Investment Institute. He noted, however, that the defense industry’s profit outlook appears “stable to slightly positive.”

Wolfe Research’s Marcus said health care will be “the biggest priority” as Democrats push to restore the expired Affordable Care Act’s enhanced premium subsidies or unwind some of the Medicaid reforms in the One Big Beautiful Bill Act.

“Healthcare stocks have been doing really well lately,” Jed Ellerbroek, portfolio manager at Argent Capital Management, told CNBC. “I think some of that is due to anti-AI trade, but I also think some of it is just due to optimism that Democrats will take power.”

Ellerbroek keeps an eye on hospital-related stocks like HCA Health And Health Principle as well as health insurers like UnitedHealth And Centene.

Financial services was the worst sector in the S&P 500 in early 2026, after President Donald Trump called on Congress to pass legislation that would cap credit card interest rates at 10%. Although the sector has been able to post gains since, with a year-to-date rise of around 3%, things could become more volatile for the Democratic-controlled group.

“Democrats will come wanting to show tangible progress on the issue of affordability, and that means targeting sectors that are at the forefront of consumers’ budgets,” said Matthew Aks of Evercore ISI. “We know that Trump has populist instincts and tendencies, and could he pick a few issues and decide to team up with the Democrats on those issues and target those industries in a populist way? Absolutely.”

Since Democratic control is often associated with increased regulation, while Republican control is believed to promote deregulation, Democrats may be interested in passing credit card rate caps if they emerge victorious.

“I think if the Democrats control one or both chambers, they would try to pass it and see if they can get Trump to sign it or force him to veto it, which would allow the Democrats to score a political point,” Aks said.

Trump could restart the war against Iran after delaying any major strike before the midterm elections, a move that could upend the entire market and cause energy stocks to outperform. Crude oil prices jumped more than 10% in October, although they gave back much of that gain on Monday.

Gasoline prices averaged $4.17 per gallon Sunday nationwide, an increase of nearly 40% from the same period last year, per AAA.

“If there is an escalation, that obviously could put upward pressure on prices right before Thanksgiving,” said Patrick De Haan, head of oil analysts at Gas Buddy, “this is also the time when Americans have very ingrained traditions of driving to visit friends and family.”

If Trump decides to act forcefully, it could dash hopes of a typical year-end recovery after the midterms.

Evercore ISI said the S&P 500 could fall by double digits to end the year at 6,800 as oil peaks if the president “moves to kinetic escalation in Iran before seated the new Congress in January” and Democrats take Congress.

— With reporting by Sarah Min, Tobias Burns and Spencer Kimball