A Sure Thing

A foolproof investment strategy is hard to find. Unless, apparently, you happen to invest around American midterm elections. Since 1950, the S&P 500 has risen in the twelve months following every midterm, averaging roughly 15%. Nineteen elections, nineteen positive returns. What could possibly go wrong?

Last week offered three reminders that markets care less about what happens than what was expected. Lula's surprise re-election wiped nearly 14% off Brazilian equities. Britain's Budget, despite all the hype about rising taxes, barely troubled the bond market. Meanwhile, 82% of reporting S&P 500 companies beat earnings expectations, yet technology shares sold off sharply as investors questioned the cost of the AI boom.

So what should we expect on Tuesday? According to Polymarket, as of this morning, Democrats have a 95% implied probability of winning the House, 72% for the Senate and 71% of capturing both. That would leave President Trump facing Democratic majorities in both chambers, potentially constraining further spending commitments but doing little to address America’s $40 trillion national debt.

Markets tend to welcome divided governments, mostly because it gives politicians fewer opportunities to interfere. Even if Democrats win only the House, gridlock would still follow; a Republican sweep, meanwhile, could revive hopes of tax cuts and deregulation, alongside concerns about further borrowing. None of these outcomes guarantees another 15% rally, particularly if the good news is already priced in.