Midterm elections could jolt stocks if Democrats sweep Congress

Investors have not priced in a Democratic sweep of Congress, according to investors and analysts quoted by CNBC. Polls and most prediction markets point toward that outcome, so the scenario could weigh on share prices on Wednesday, the report says.

Tobin Marcus, head of U.S. policy and politics at Wolfe Research, said investors show "begrudging acceptance" of a Democratic sweep but are not positioned for it. His firm's survey of more than 100 institutional investors suggests they are not strongly positioned for any particular result. Marcus said Wolfe shares the view that "polling is likely overstating Democratic strength."

JPMorgan expects a Democratic win to push the S&P 500 down about half a percent on Wednesday. JPMorgan traders predict a gain of up to 1% if Republicans keep the House. Citigroup strategists said Republicans losing the House but keeping the Senate could be "a tailwind for equities into year-end."

Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, said Republican control of both chambers could spur a rally. "From a certainty standpoint, the market knows what to do with Republicans holding both chambers," he said.

Stocks have historically risen in the year after midterm elections, the report says, with the S&P 500 up one year out after every midterm since the early 1980s. Jonathan Krinsky, chief market technician at BTIG, wrote that the S&P 500 typically averages a 14% drawdown in the second half of midterm years. He argued that a post-midterm rally is "actually more likely" the opposite outcome this year, because the index has already gained double digits in 2026.

Turbulence in artificial intelligence stocks has also pressured the market. The Nasdaq Composite posted its worst day since June on Friday, and AI shares led the market lower again on Monday. Analysts told CNBC that a strong Democratic showing could add pressure. Rob Rains of Washington Analysis said increased Democratic control at the state level would likely be a headwind for data center and technology capital equipment stocks. Goldman Sachs strategists said a Democratic Congress "might limit data center tax incentives, but a national moratorium looks unlikely in any election outcome."

Wolfe's Marcus said a surprise loss by Republican Gov. Greg Abbott in Texas, a key data center hub, has the "potential to spook" the market in the short term.

Analysts also expect a Democratic sweep could pressure defense stocks and lift healthcare stocks. Alex Sagal of Wells Fargo Investment Institute said a substantial Democratic sweep "could limit real spending growth" for defense unless a broader agreement increases defense and health-care funding. He described the defense industry's earnings outlook as "stable to modestly positive." Marcus said healthcare will be the biggest focus, with Democrats expected to push to restore expired Affordable Care Act enhanced premium subsidies or unwind some Medicaid reforms in the One Big Beautiful Bill Act.

Jed Ellerbroek, portfolio manager at Argent Capital Management, said healthcare stocks have performed well recently. He attributed part of that to the anti-AI trade and part to optimism about a Democratic takeover. He is watching hospital operators HCA Healthcare and Tenet Healthcare, and insurers UnitedHealth and Centene.

Financials was the worst S&P 500 sector in early 2026 after President Donald Trump called on Congress to cap credit card interest rates at 10%. The sector's year-to-date gain is now about 3%. Matthew Aks of Evercore ISI said Democrats would likely target consumer-budget sectors on affordability, and that Trump "has populist instincts, populist leanings."