Quarterly Outlook
Q1 Outlook for Traders: Five Big Questions and Three Grey Swans.
John J. Hardy
Global Head of Macro Strategy
Americans head to the polls on 3 November to decide who controls Congress for the final two years of President Donald Trump's term. Democrats are favoured to regain the House of Representatives, while control of the Senate remains uncertain.
History offers an intriguing statistic. Following all 19 US midterm elections between 1950 and 2022, the S&P 500 was higher 12 months later, with an average gain of roughly 15%. An impressive record, but no guarantee that history will repeat itself, especially with stock valuations already elevated.
For investors, however, the more interesting question is not simply whether stocks will rise after the vote. It is what happens differently from what markets already expect.
An anticipated Democratic victory might generate little reaction. An unexpected Republican sweep, or stronger Democratic gains, could force investors to rethink their assumptions.
While political headlines will attract attention, the more interesting investment story may unfold across individual sectors.
Markets are forward-looking. Share prices reflect not only current conditions but also expectations about future policies, profits and risks.
A divided Congress could make major legislation harder to pass, limiting changes to taxes and regulation. Republican control of both chambers could preserve greater room for Trump's agenda. A Democratic sweep could increase political scrutiny and strengthen congressional influence over spending.
More importantly, the election's impact will not be evenly distributed across the market.
Healthcare companies are particularly exposed to government decisions.
Democratic gains could increase expectations of support for health insurance coverage, potentially helping hospitals and insurers. However, renewed pressure on prescription drug prices could weigh on pharmaceutical companies such as Pfizer and Eli Lilly.
The distinction matters: more healthcare spending does not necessarily mean higher profits for every healthcare business.
Continued Republican control could reinforce support for domestic oil and gas production, potentially benefiting ExxonMobil and Chevron.
Stronger Democratic gains might improve sentiment towards renewable-energy companies such as First Solar and NextEra Energy by raising hopes of greater protection for clean-energy incentives.
Yet growing electricity demand from artificial intelligence and data centres creates opportunities across both traditional and renewable energy. Political preferences matter, but customers still need electricity.
Microsoft, Alphabet and Nvidia face growing political scrutiny over AI, competition and energy consumption.
Democratic gains could increase expectations of congressional investigations and tougher oversight. Republican control could support a more business-friendly approach, although technology regulation increasingly attracts attention from both parties.
For investors, the bigger issue remains whether enormous AI investments can produce equally impressive profits.
Banks such as JPMorgan Chase and Bank of America could benefit from expectations of lighter regulation under continued Republican control.
Democratic gains might raise concerns about oversight, consumer protection and capital requirements.
However, interest rates, loan demand and borrowers' ability to repay debts will probably matter more for bank earnings than congressional arithmetic.
Lockheed Martin and RTX depend heavily on government contracts, making budget negotiations particularly important.
A divided Congress could complicate spending agreements and delay programmes. Nevertheless, geopolitical tensions and military modernisation continue to support demand.
The central question is less whether defence spending disappears and more where, when and how efficiently it gets allocated.
Three risks deserve particular attention.
First, political gridlock could create prolonged disputes over federal budgets and borrowing limits. Second, unexpected policy changes could affect corporate profits. Third, high equity valuations leave less room for disappointment, even if election results appear favourable.
Importantly, a political surprise does not automatically translate into legislation. Congress, the presidency and existing legal constraints all influence what actually changes.
Election night may produce clear winners in Washington, but identifying the winners on Wall Street will take longer.
Some companies may rally because feared policies never materialise. Others may fall despite favourable results because investors had already anticipated good news. Many businesses will continue growing, investing and competing regardless of which party controls Congress.
For investors, the opportunity lies in separating political noise from genuine changes in company fundamentals. After all, elections determine who makes the rules, but businesses still need to earn the profits.
Washington may decide tomorrow's headlines. Corporate earnings will shape the years that follow.