Midterm elections: What a Democratic landslide victory means for stocks

Investors and analysts said that scenario could weigh on stock prices on Wednesday because the stock market has not yet priced in Democratic control of Congress, despite what some polls and most prediction markets have said.

If Republicans manage to maintain control, it could trigger short-term relief rallies, they said.

Short-term movements aside, the typical post-intermediate pattern for the coming months is bullish. But some are wondering whether the market can reverse its historical positive trend this time. S&P500 There has already been a big uptick this year leading up to the election.

When it comes to specific stocks to watch, AI stocks could continue to fall on Tuesday night, especially on the belief that a landslide Democratic victory in the Texas gubernatorial race will spur stronger data center regulation nationwide. Concerns about spending limits could weigh on defense stocks.

Opinion polls predict a Democratic victory in the House of Representatives and a Democratic victory in the Senate. Prediction markets are more favorable to Democrats, calling for a blues sweep.

Tobin Marcus, head of U.S. policy and politics at Wolf Research, said investors have indicated they are “reluctantly accepting” the base case of a real Democratic victory, but they are not positioning themselves that way. The firm’s recent survey data of institutional investors in more than 100 companies suggests that institutional investors do not have a strong stance on any particular outcome.

“Investors appear to have significant skepticism about whether the final results will be as favorable to Democrats as the polls suggest,” Marcus told CNBC, noting that the firm shares the view that “the polls are likely exaggerating the strength of the Democratic Party.”

JPMorgan expects a blue wave to push the S&P 500 down by about 0.5% on Wednesday.

Meanwhile, if Republicans end up retaining control of both chambers of Congress, that could spur stock market gains, said Samir Samana, head of global equities and real assets at Wells Fargo Investment Institute.

“From a certainty standpoint, the market knows what to do if Republicans control both chambers,” he said.

Citigroup strategists said Monday that if Republicans were able to lose the House but retain the Senate, it could be a “tailwind for stocks heading into the end of the year.” Traders at JPMorgan expect the stock to rise as much as 1% on Wednesday if Republicans retain control of the chamber.

Excluding short-term movements, stock prices tend to rise after the end of interim results. In fact, after every midterm election dating back to the early 1980s, the S&P 500 was up a year ago.

But with the S&P 500 already up double digits so far in 2026, some on Wall Street are concerned that investors are being too complacent heading into this year’s election.

During the midterm election period, the S&P 500 typically sees an average drawdown of 14% at some point in the second half of the year, said Jonathan Krinsky, chief market technologist at BTIG.

“The reason stocks often do well in November during the midterm election period is because (the S&P 500) typically slumps before elections. This year, the opposite is true,” Krinsky wrote last week. “Therefore, while the consensus is that prices will rise from the interim period onwards, we believe the opposite is likely to actually be the case.”

It doesn’t help that the broader market has been under significant pressure recently due to AI trade disruption. Nasdaq Composite Friday will mark the worst day since June. AI stocks continued to lead the market decline on Monday.

Trade could come under further pressure if Democrats perform well in Tuesday’s midterm elections.

Analysts said increased Democratic control at the state level would likely be a headwind for data center and technology capital equipment stocks.

“We’re going to see more early warning signs in various states regarding advances in AI infrastructure,” Rob Raines of Washington Analysis told CNBC.

Goldman Sachs strategists said this week that Democratic Congresses “could limit data center tax incentives, but a nationwide suspension is unlikely regardless of the outcome of the election.”

One example is Texas, which is a major hub for data center construction. Wolf’s Marcus said a surprise loss there by Republican Gov. Greg Abbott “could spook” the market in the short term.

Analysts and investors said the blue wave could weigh on defense stocks while boosting health care stocks.

“A significant Democratic victory could limit real spending growth unless a broader deal increases funding for both defense and health care,” said Alex Sagal, global equity analyst at Wells Fargo Investment Institute. But he noted that the defense industry’s earnings outlook looks “stable to moderately positive.”

Wolf Research’s Marcus said health care will be a “biggest focus” as Democrats push to restore enhanced premium subsidies from the expired Affordable Care Act and unwind some of the Medicaid reforms under the One Big Beautiful Bill Act.

“Healthcare stocks have been doing really well lately,” Jed Ellerbrook, portfolio manager at Argent Capital Management, told CNBC. “I think some of it is anti-AI trade, but I also think some of it is just optimism that Democrats will take over.”

Ellerbrook focuses on the following hospital stocks: HCA Healthcare and Tenet Healthcare Similarly, health insurance companies united health and Centene.

The financial sector was the worst sector in the S&P 500 index in early 2026 after President Donald Trump asked Congress to pass legislation capping credit card interest rates at 10%. The sector has seen steady growth since then, and is currently up about 3% year-to-date, but the situation could become even more volatile for the Democratic-controlled group.

“Democrats will come in wanting to show concrete progress on affordability issues, and that means targeting sectors that are front and center on the consumer budget front,” said Evercore ISI’s Matthew Ax. “We know that Mr. Trump has populist instincts, populist tendencies. And could he pick some issues and decide to work with Democrats on those issues and target those industries in a populist way? Absolutely.”

If Democrats win, they could be interested in lifting credit card interest rate caps, given that Democratic control often involves more regulation and Republican control is thought to encourage deregulation.

“If Democrats control one or both chambers, I think they’ll try to pass a bill and see if they can get President Trump to sign it or veto it. That would give them some kind of political points,” Ax said.

After delaying a major attack until the midterm elections, President Trump could restart the war on Iran, which could upend the entire market and cause energy stocks to outperform. Oil prices rose more than 10% in October, but gave back much of that gain on Monday.

The national average gas price on Sunday was $4.17 per gallon, an increase of nearly 40% from the same period last year, according to AAA.

“If there is an escalation, it’s clear there will be upward pressure on prices ahead of Thanksgiving, which is also a time when Americans have a very strong tradition of driving to see friends and family,” said Patrick de Haan, head oil analyst at Gas Buddy.

If President Trump decides to take tough action, hopes for a typical post-midterm election year-end rally could be dashed.

Evercore ISI said that if the president “moves to escalate the situation in Iran ahead of a new Congress taking up the floor in January” and Democrats take control of Congress, the S&P 500 could end the year at 6,800, down double digits due to soaring oil prices.

—Reporting by Sarah Ming, Tobias Burns, Spencer Kimball