Three Themes that Matter More Than the Midterms

Markets should look past the U.S. midterms because Federal Reserve policy, higher rates and the AI boom are more powerful drivers of returns and volatility.

• Historical links between election outcomes and market performance are weak, while midterm-year equities have typically been weaker and more volatile, especially in the second half; this year, resilient earnings and AI-linked investment have broken from the usual pattern.
• The Federal Reserve remains the key market institution, with inflation above its 2% target and one or two additional rate hikes seen as possible through September 2027.
• The bond sell-off has pushed Treasury yields to multi-decade highs, and much of the rise in longer-term yields has come from higher real yields, signalling expectations of resilient growth and greater compensation for duration risk.
• AI may support future productivity as demographics deteriorate, but current spending on chips, data centers and energy infrastructure is increasing pressure on semiconductors, electricity demand and construction costs.
• An NPR/PBS News/Marist poll in September found that 58% of registered voters expected nationwide data-center construction to have a negative impact, while 65% opposed construction in their communities; political resistance could constrain AI-related capital spending from 2028 onward.

Takeaway: Investors should remain invested and build portfolios able to withstand sharp moves in rates, while basing positioning on monetary policy, the rate regime and AI-related economic and earnings effects rather than the election calendar.