AOR Update: The Big Picture Beats Politics

Above-trend US growth and earnings, reinforced by a historically strong post-midterm period, should outweigh election-related volatility and support equities over the next year.

• Prediction markets price a roughly 90% chance of a Republican House loss and a 65% chance that Democrats win the Senate, but the size of each majority matters more than which party controls Congress.
• A majority of fewer than five House seats or a similarly narrow Senate majority would likely produce gridlock, brinkmanship, government-shutdown risks and little new fiscal legislation.
• A workable Democratic majority in both chambers could enable a grand bargain exchanging higher defense spending for restored social programs; the 2019 Bipartisan Budget Act increased the Congressional Budget Office's 10-year deficit projection by US$1.7 trillion.
• Since 1950, the S&P 500 has risen an average of 15.1% in the 12 months after midterm elections, with all 19 observed periods producing positive returns, although past performance is not guaranteed.
• US GDP growth accelerated from 2.2% annualized in the second quarter to 3.4% in the third quarter, while S&P 500 earnings were on track for 30% year-over-year growth and estimates for 2026 and 2027 continued to rise.

Takeaway: Investors should focus less on the election result than on the majority's margin and the underlying economy; a narrow majority could increase volatility, while a durable rally is supported by the post-midterm seasonal effect, resilient growth and strong earnings, with higher deficits potentially pushing long-term yields higher.