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Markets, Midterms, and Misconceptions
Updated: 3 days ago
By Adam Day, Financial Advisor
Here we are again, a year that ends with an even number. The kids are back in school; football season has arrived. All can be inferred to mean the political ads have started. Yes, it’s a midterm election year.
If financial markets had a campaign slogan during midterm elections, it would probably be: "Tell me who's in charge, so I can get back to work." Markets generally dislike uncertainty more than they dislike any specific political outcome. Leading up to midterm elections, investors are left guessing about future tax policy, spending priorities, and regulatory changes. Once the political dust settles, clarity often replaces speculation, allowing investors to focus on the fundamentals that ultimately drive long-term returns.
That's not to say elections are irrelevant. The party that controls the separate chambers of Congress gain influence over key committees responsible for taxes, banking regulation, healthcare policy, energy legislation, and federal spending.
Those decisions can shape investor expectations. The question isn't whether elections matter. It's understanding how much they matter and where their influence begins and ends.
Midterm Elections
There are a few things that are at play during a midterm election.
Will the current party in power continue to retain control of both the House and Senate to advance their agenda?
Will governing control that is split in Congress from the Presidency stall the President’s agenda?
Who will control the Committees that matter the most for financial markets?
Will the current party in power continue to retain control of both, the House and Senate and advance their agenda?
Historically, this is unlikely. There have only been two elections since 1934, where the President’s party has advanced their majority in both, the House and Senate. 1934 and 2002 (following the attacks of Sept. 11, 2001.)
As an additional data point, in 1998, Democrats and President Bill Clinton, advanced four House seats and zero Senate seats, but still did not have a majority.
Will the governing control that is split in Congress stall the President’s agenda?
Looking back, it is usually the case that the President’s party loses seats in the House of Representatives. Since 1934, the President's party has lost House seats in all but a handful of midterm elections. The average loss has been roughly 27 House seats, which is often enough to flip control when the majority is narrow.
Who will control the committees that matter the most for financial markets?
In the case of a divided House, Senate and/or Presidency, this would be a matter for potential impact. The House of Representatives and Senate have separate committees that they oversee.
Every committee is led by a chairperson from the majority political party, while the largest minority party member is called the ranking member. Committee chairs hold the power to schedule bills, run hearings, and decide if a proposal moves forward.
The majority party of the Senate appoints the committee chairs for the Senate Committees, and the same goes for the House of Representatives. So, in the case of different parties controlling the Senate and the House. There could be some conflicting directions on these committees.
While the list is vast, the committees that have potential for the most impact for financial markets would be:
House Ways and Means (tax policy)
Senate Finance (tax policy)
House Financial Services (banks, SEC, capital markets)
Senate Banking, Housing, and Urban Affairs (financial regulation)
House and Senate Appropriations (federal spending)
House and Senate Budget (fiscal policy)
House Energy and Commerce (healthcare, energy, telecommunications)
Senate Energy and Natural Resources (energy policy)
House and Senate Armed Services (defense spending)
In Washington, elections determine who gets the offices. Committees determine who gets the keys to the machinery. The potential paths this could route is quite vast; and would be too lengthy for the purpose of this article and likely not a good use of your reading time. Here are a few simple ways this could have impact.
Committees control the legislative pipeline. Most bills never reach the House or Senate floor unless a committee approves them first.
Committee chairs decide:
Which proposals receive hearings
Which bills get marked up
Which legislation advances
Committees Influence Regulation. Several committees oversee regulators that directly affect financial markets:
House Financial Services Committee oversees matters involving banks, capital markets, the SEC, and financial institutions.
Senate Banking, Housing, and Urban Affairs Committee oversees banking regulation and financial-market issues.
A change in committee leadership can signal:
More oversight of large banks
Looser or tighter financial regulations
Changes to cryptocurrency policy
Increased scrutiny of mergers and acquisitions
Committees Control Oversight and Investigations
Committees have subpoena power and can hold hearings that affect entire industries. For example:
Tech companies may face antitrust hearings.
Pharmaceutical firms may face drug-pricing investigations.
Energy companies may face environmental oversight hearings.
Banks may face reviews of lending practices.
If you look at the current polling and prediction markets, it appears that the Senate races look relatively tight for a 50/50 split between Republicans and Democrats, while the House is leaning towards a Democrat Majority. Polls (especially) and Prediction Markets haven’t been the most reliable in the internet age. Ultimately, we won’t know the outcome until they play the game on the field. In the spirit of football season “…and that’s why they play the game.”
On financial markets and midterm election cycles
Markets pay attention because policy changes can create both risks and opportunities. But markets also have a habit of reminding us of who's really in charge. Long-term returns are driven primarily by economic growth, corporate earnings, interest rates, productivity, and innovation, not campaign slogans. In fact, one of the more consistent patterns surrounding midterm elections is that uncertainty often declines once the votes are counted and the political landscape becomes clearer.
For investors, the real challenge isn't predicting election winners. It's avoiding the temptation to make investment decisions based on political headlines.
Understanding how midterm elections can influence markets, where congressional power truly resides, and what history tells us about prior election cycles can help investors stay focused on what matters most: a disciplined long-term investment strategy.
After all, portfolios aren't managed by pollsters. They're built on fundamentals.
So far this year, we would classify that the markets have had a ‘typical midterm election cycle’.
What we mean by that is that we’ve had strong markets leading up, an intra-year decline, and muted returns from the summer months so far. The chart, below, goes back to 1950 and compares the S&P 500’s returns during midterm election cycle and compares that to the non-midterm election cycles.
An interesting point to note would be that since 1950, in the chart above, there has never been a negative 11-month return following the midterm election month.
Focus on the Fundamentals
While it's natural to feel strongly about election outcomes, the stock market has historically generated long-term returns under both, Republican and Democrat administrations as well as under periods of unified and divided government.
Markets don't reward investors based on their political views. They most often reward patience, discipline, and a willingness to stay invested through uncertainty.
Some Points of Market Optimism
1. The market is ‘cheaper’ than it was a year ago
I believe over the past year, corporate earnings expectations have risen significantly, helping to reduce valuation multiples even as the S&P 500 has moved higher. As of late August 2026, the S&P 500 was trading at roughly 20x forward earnings, down from levels above 22x forward earnings seen about a year ago.
In other words, investors are paying less for each dollar of future earnings than they were a year ago.
2. Broad participation and breadth
I believe one of the most encouraging signs of a healthy bull market is broad participation. Rather than relying on a small group of companies to drive returns, a broad market advance is characterized by strength across multiple sectors, industries, and company sizes. When technology, healthcare, financials, industrials, consumer stocks, and other areas of the market are all contributing, it suggests confidence in the underlying economy is widespread.
Broad participation can also make a market rally more durable. If leadership is concentrated on only a handful of stocks, the market may become more vulnerable should those companies stumble. In contrast, when gains are supported by a larger portion of the market, investors have a wider foundation of growth to build upon.
Data from FTSE Russell Indices and market trackers highlights the performance breakdown as of late August 2026:
Micro-Cap (Russell Microcap): Up 26.49% YTD
Small-Cap (Russell 2500): Up 22.71% YTD
Small-Cap (Russell 2000): Up 22.16% YTD
Mid-Cap (Russell Midcap): Up 18.03% YTD
Large-Cap / Broad (S&P 500): Up 12.94% YTD
Large-Cap (Russell 1000): Up 12.99% YTD
3. Corporate Earnings are Growing
At the end of the day stock prices tend to follow earnings and guidance. When companies generate higher revenues, improve profitability, and deliver growing earnings, they create the foundation for long-term market appreciation. Strong earnings growth is particularly important because it can support higher stock prices without making the market significantly more expensive.
Simply put, when corporate profits are rising, businesses are becoming more valuable, and that is one of the healthiest signs an investor can see in the market.
The chart below, shows the current S&P 500 broken down by sector on the X-axis and various metrics along the Y-axis.
Along the Y-axis, if yo
that jump off the page.
Specifically, with sectors like Materials, Technology, Health Care, Utilities and the aggregate S&P 500.
In the end, portfolios are built on earnings, economic growth, and discipline.
Elections simply provide the backdrop for another chapter in the market's long story. For long-term investors, the most successful strategy has rarely been predicting election outcomes. Instead, it has been maintaining a disciplined investment plan through changing political and economic environments.
What investors can control are the factors that often have the greatest impact on long-term success: maintaining a disciplined investment plan that is tied in with their own timeline of their goals, staying diversified, only taking a level of risk that they are comfortable taking, and remaining focused on long-term goals.
S&P 500 Index is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies.
Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
