A bigger-than-expected win for Democrats in the midterms could deliver 'short-lived weakness' for stocks, strategists say

By Victor Reklaitis

A divided federal government is expected after the midterm elections, but the size of the congressional majorities could really matter to U.S. markets

One closely watched race in this fall's midterm elections is the U.S. Senate race in Michigan between Democratic nominee Abdul El-Sayed (left) and Republican nominee Mike Rogers (right).

Markets have largely priced in the high likelihood of a divided federal government following the midterm elections, as Democrats are expected to retake at least one chamber of Congress, reckons UBS strategist Kurt Reiman.

But there's "still some room" for a possible stock selloff on the election results, said Reiman, who is the Swiss bank's lead analyst for the midterms and its head of fixed income for the Americas.

The drop for stocks would come if Democrats score bigger-than-expected majorities in the House of Representatives and the Senate, according to Reiman.

"If we end up with the Senate going by more than just one or two seats into Democrats' favor, and if Democrats can pick up maybe a dozen- or a couple-dozen-seat advantage in the House, this may lead to some short-lived weakness in stocks on the potential for increased regulation," Reiman said during a recent roundtable hosted by UBS.

"That volatility would likely subside," he added, because while that result would be a signal for what's ahead in the 2028 presidential election, "that's still far enough away that the markets would quickly get back to the fundamentals - which are the economy, monetary policy, fiscal policy, the direction of inflation and especially earnings."

Another adviser to investors expressed some agreement with the idea that a larger-than-anticipated Democratic win could lead to a short-lived selloff.

"If the Democrats win big in the House in particular, you're going to have a robust debate between the democratic-socialist wing of the party and the centrist Democratic Party, and that debate is going to take years to play out," said Nathan Dean, a senior government analyst at Bloomberg Intelligence.

Dean said in an interview that he could see investors initially think that the American populace had turned out to be more Democratic-leaning than expected, but then he "could see markets begin to calm down after a win like that," due to a realization that a lot of shifts still could happen before the 2028 election.

The S&P 500 stock index SPX is up 12% this year to date, but it has pulled back over the last three weeks after scoring a record close on Oct. 6.

Democrats' likelihood of winning the House has been at around 90%, according to prediction markets such as Kalshi and Polymarket. Their chance of taking back the Senate has stood at about 65%. (Polymarket has a data partnership with MarketWatch's publisher, Dow Jones.)

Don't miss: The 5 big voting issues in the midterm elections that will impact your wallet

And see: Worried about stocks? Relief may be coming after the midterms - no matter who wins.

Is gridlock actually good for stocks?

UBS's Reiman said his team is not recommending changes to portfolio allocations around the midterms, in large part because "legislation is going to be difficult to achieve." There is likely to be legislative gridlock, as Democrats probably won't be able to achieve veto-proof majorities in either chamber, he noted.

That's different from his recommendation ahead of the 2024 presidential election, when he noted that investors might want to buy gold (GC00) to prepare for an uncertain period, because it might have taken time to get a result in that year's White House race.

Ahead of this year's midterms, Reiman also pushed back on the Wall Street motto that "gridlock is good for stocks."

"We find that stocks do OK during gridlock. There's this idea that gridlock is good - we don't necessarily see that," he said.

"When you have united government, you do have the opportunity for large, sweeping legislation that can tend to be supportive of the economy. We saw that play out last year," Reiman added, referring to the big Republican tax law that provided boosts to sectors and individuals.

Related: Is gridlock in Washington actually good for stocks? Here's what historical market data says.

-Victor Reklaitis

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10-27-26 0930ET