US Midterm Results Modestly Shift Policy Risks, but Fundamentals Still Guide Portfolios

Democrats have regained control of both chambers of Congress by a wider margin than expected and secured key governorships. They have won a 54-seat Senate majority, with two unresolved seats, and are projected to win more than 250 House seats. The market reaction has been moderate so far: US equities have rallied, the dollar dipped, and Treasury yields declined, while the price of oil fell more sharply. The decisive result reduced uncertainty about a contested election but is unlikely to produce sweeping legislative changes.

For long-term investors, an unexpected election outcome alone does not warrant changing portfolio positioning. Our research has consistently argued against investing around elections. Over long horizons, returns have been more closely associated with earnings growth, valuations, monetary policy, and the economic cycle.

Markets will instead focus on how policy affects AI investment and profitability, inflation and Federal Reserve policy, the Iran War, and mounting government debt. These forces are interconnected: AI spending has supported economic activity while increasing demand for power and financing, elevated energy prices have added inflation pressure, and substantial government borrowing has compounded interest-rate concerns.

A change in congressional leadership does not immediately alter these dynamics. President Trump’s veto power constrains major partisan tax and regulatory legislation. Congressional oversight, including scrutiny of corporate ties to the administration, and state and local decisions could increase company- and industry-specific risks.

Policy channels and portfolio risks

• Equities and AI. AI-linked companies could face volatility amid scrutiny of data centers’ power demand, energy affordability, and investment returns. Local ballot results suggest growing resistance, with some states expected to impose temporary, conditional pauses on new construction. Reduced tax incentives, stricter power and water rules, and community commitments could raise costs, delaying or redirecting projects without necessarily ending the buildout. Whether AI monetization justifies spending and earnings growth supports valuations remain the key questions—favoring diversification over concentrated AI exposure.
• Iran and energy. Congress could pressure the administration to end the Iran War by withholding new military funding, but existing funds and additional lame-duck appropriations could limit Congress’s ability to exert meaningful pressure. Escalation could raise energy prices, squeeze purchasing power and margins, and fuel inflation—pressuring equities and bonds alike. By contrast, a durable ceasefire could ease these pressures and support risk assets in 2027.
• Fixed income. Gridlock could limit fiscal stimulus, but debt-limit negotiations may add volatility. Substantial borrowing needs and energy-driven inflation could keep Fed policy more restrictive and Treasury yields elevated.

Our central message is unchanged. Near-term volatility may increase as markets digest election results, fiscal negotiations, and developments in Iran. The election result alone does not warrant changing allocations. US equities have generally delivered strong returns in the year after midterms across different political compositions. Since 1930, excess returns have averaged 15% over those 12-month periods. Today’s combination of substantial AI investment, elevated energy prices, and fiscal pressures reinforces the need to assess the cyclical backdrop rather than rely on the election calendar.

Portfolio decisions should remain anchored in fundamentals and valuations, with allocations aligned to each client’s objectives, liquidity needs, and risk capacity. We remain confident in the key tenets of our investment approach: long-term orientation, broad diversification, and disciplined manager selection.