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(Bloomberg) — While US midterm election results historically bode well for stocks regardless of which party wins, some Wall Street strategists are warning clients to temper their bullishness this time around.
From a fundamental perspective, there is the threat of a corporate earnings slowdown due to tougher federal and state oversight of the artificial intelligence industry by newly empowered Democrats. Elevated interest rates also raise questions about whether history will repeat itself.
And on closer inspection, even the historical analogs showing stocks always rise in the year after midterms are not overwhelmingly bullish. Periods with a Republican in the White House and Democrats in control of both houses of Congress are among the weakest setups for equity returns, with the S&P 500 averaging an annual gain of just 4.9% since the early 1950s, according to data compiled by Carson Investment Research. A split Congress and a Republican president have typically been more favorable, with the index rising 14% annually.
“The track record is not as good,” Lori Calvasina, RBC Capital Markets head of US equity strategy, said on Bloomberg Television of this type of divided government.
For the time being, the removal of uncertainty surrounding the next Congress appears to be inspiring investors to buy the pre-election dip that pulled the S&P 500 down 3.2% from its last record on Oct. 6 and sent the tech-dominated Nasdaq 100 lower by almost 10% over the same period.
Options pricing indicates that the S&P 500 is poised to swing nearly 1% in either direction on Wednesday — among biggest implied moves for the index over the next month, according to Citigroup Inc. data. The S&P 500 gained 1.7% at 10:07 a.m. in New York, while the Nasdaq 100 Index added 2%.
The benchmark index is more likely to advance than decline following the midterms since President Donald Trump holds veto powers, according to a scenario analysis by JPMorgan’s Market Intelligence desk led by Andrew Tyler.
“Many fear an AI selloff on assumed higher regulation, but it will be difficult to implement any policies as Trump has stated that he will not sign any bills that limit AI expansion and Dems cannot achieve a veto-proof majority in both chambers of Congress,” Tyler wrote in a note to clients.
Meanwhile, history backs up the case for a post-election lift for US equities: The S&P 500 has typically performed far better after midterm elections than before them. That pattern has generally held when the opposition party wins control of one or both chambers of Congress.
