The upcoming US midterm elections could reshape financial markets well beyond their immediate impact on Congress, as investors begin assessing the political outlook for the 2028 presidential race and the future of President Donald Trump’s economic and foreign policies.
If Democrats win control of both chambers of Congress, Washington could face legislative gridlock during the final two years of Trump’s presidency. While the president would retain considerable authority over foreign policy, a Democratic-controlled Congress could complicate his domestic agenda and increase uncertainty around trade, energy, technology and government spending.
For investors, however, the larger question may be whether the midterms mark the beginning of a political transition that could eventually reverse or weaken policies introduced since Trump returned to the White House in 2025.
Why the Midterms Matter for Markets
Prediction markets have suggested a strong possibility of Democrats winning both chambers of Congress, with an even greater likelihood of capturing the House of Representatives. Although these forecasts are not guarantees of the election outcome, they indicate that investors may need to prepare for a divided government.
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A Democratic-controlled Congress could limit Trump’s ability to pass new legislation, even as he continues to direct major aspects of US foreign policy. The resulting standoff could affect policy decisions on taxation, cryptocurrency regulation, artificial intelligence infrastructure and federal spending.
One immediate concern is the possibility of another debt-ceiling confrontation early next year. A prolonged dispute between Congress and the White House could unsettle financial markets, particularly if investors become concerned about government borrowing and the stability of US fiscal policy.
Restrictions or delays affecting cryptocurrency legislation and the construction of AI data centres could also influence investment decisions in sectors that have benefited from expectations of a favourable regulatory environment.
Foreign Policy Could Become a Major Market Risk
A Democratic victory in the midterms would not automatically end Trump’s foreign policy agenda. However, reduced congressional support and growing divisions within the Republican Party could make some initiatives more difficult to sustain.
Investors will be watching developments involving Iran and the wider Middle East, the war in Ukraine, relations with China, NATO and US policy toward Latin America. Decisions involving military operations, sanctions and trade restrictions could affect energy prices, defence spending and global supply chains.
JPMorgan’s Center for Geopolitics has identified three major themes to watch after the elections: domestic policy gridlock, Trump’s efforts to shape his political legacy and the opening phase of the 2028 presidential race.
The bank has also highlighted growing uncertainty around issues that previously attracted broad bipartisan support, including transatlantic relations and US policy toward Russia and China.
For markets, this could mean reassessing the durability of existing policy commitments rather than simply reacting to individual election results.
The 2028 Race Could Change Investment Expectations
The longer-term market implications may emerge as potential presidential candidates begin positioning themselves for 2028.
Although the field of candidates remains uncertain, prediction markets have placed the chances of a Democratic or Republican presidential victory at roughly comparable levels. That uncertainty could encourage investors to consider how a change in administration might affect tariffs, energy policy, taxation, regulation and international alliances.
Markets often respond to anticipated policy changes before they become official. If investors begin to expect a reversal of some Trump-era measures, asset prices could adjust well before the next presidential election.
However, a change in political expectations does not necessarily translate into an immediate change in investment strategy. Economic growth, corporate earnings, interest rates and technological developments will remain important drivers of market performance.
How Markets Have Performed Since Trump’s Return
Financial markets have recorded substantial gains since Trump’s 2024 election victory, although those gains reflect a combination of economic, technological and geopolitical factors.
The S&P 500 and MSCI’s global equity index have each risen by just over 30% over the two-year period described in the market analysis. The Nasdaq has gained approximately 42%, while the largest US technology companies grouped as the Magnificent Seven have advanced around 45%.
The Philadelphia Semiconductor Index has more than tripled amid strong demand for artificial intelligence infrastructure and chips.
Energy markets have followed a different trajectory. Brent crude prices have risen by approximately 53%, with the reported increase concentrated in the period following the outbreak of the Iran war in February.
US defence stocks have gained around 27%, underperforming broader equity benchmarks, while European defence stocks have risen by approximately 60%.
The US dollar has declined by less than 2% against a basket of major currencies over the period, while Treasury securities have faced pressure. The yield on the 10-year US Treasury note has increased by roughly one percentage point since 2024, reflecting a combination of inflation concerns, monetary policy expectations, tariffs and higher energy costs.
These figures illustrate the scale of market movements during Trump’s return to office, but they do not establish that his policies alone caused those changes. The artificial intelligence boom, corporate earnings and broader economic conditions have also played important roles.
Could a Recession Change the Outlook?
Another question for investors is whether the US economy can continue expanding without a significant cyclical downturn.
So far, the expected recession has not materialised. Nevertheless, higher energy costs, trade uncertainty and elevated borrowing costs could complicate the economic outlook if they persist.
The timing of any future slowdown could matter politically as well as economically. A recession before the 2028 election could weaken the incumbent party’s prospects, while continued economic growth might help Republicans defend their record.
For financial markets, a downturn could outweigh the immediate effects of political gridlock by reducing corporate earnings, changing interest-rate expectations and prompting investors to seek safer assets.
Conversely, continued growth and strong technology investment could sustain market gains even if Washington becomes less effective at passing legislation.
What Investors Should Watch Next
The midterm elections are unlikely to provide a definitive answer about the direction of markets through 2028. Instead, they could mark the beginning of a period in which investors pay closer attention to the next presidential contest and the potential reversal of existing policies.
The immediate priorities will include the balance of power in Congress, the risk of a debt-ceiling dispute, the direction of US trade and foreign policy, and the durability of the artificial intelligence investment boom.
The central issue is not simply whether Democrats or Republicans win the midterms. It is whether the result changes expectations about the longevity of Trump’s policy agenda.
If investors begin to anticipate a different political direction in 2028, the effects could gradually spread across equities, currencies, bonds, energy markets and defence stocks. The election may therefore matter as much for the political future it signals as for the congressional balance it produces.
With information from Reuters.
