4 market-moving issues investors should watch now that the midterms are over

By Joseph Adinolfi

The Democrats' Tuesday sweep could have far-reaching consequences for markets and the economy

Markets are taking the Democrats' resounding midterm victory in stride.

The 2026 midterm vote is over. Now comes the race to parse what the Democrats' resounding victory might mean for investors in the months ahead.

The initial reaction suggested that the election was acting as a "clearing event" for risk, as many on Wall Street had anticipated. While stock futures initially dipped overnight, major indexes have come roaring back since the opening bell.

The Cboe Volatility Index VIX, known as Wall Street's "fear gauge," was on track for its biggest daily percentage-point decline since April 9, 2025, when President Donald Trump announced a three-month tariff pause that inspired a massive stock-market rebound.

Some chalked up the market's enthusiastic response to the fact that Democrats might move to throw out some of Trump's tariffs, particularly the aggressive levies against Canadian goods. Others pointed out that after all the uncertainty and second-guessing ahead of the vote, investors on Wednesday appeared to simply be glad the midterms are over.

But Democratic control of the House and Senate, as well as governor's mansions in Texas, Ohio and other heretofore reliably red states, could have major ramifications for markets down the road as investors adjust to Washington's new policy priorities.

Here are a few things worth watching.

The price of compute

Opposition to new data-center construction appeared to be a potent motivator for voters, and now investors will need to wait and see how a slower pace of development redounds on markets.

"All else equal, this new environment should increase the cost of compute and is positive for the current owners of data-center capacity," said Warren Pies, the founder of 3Fourteen Research, who correctly anticipated Tuesday night's "bluenami" outcome.

This should help to boost shares of some technology stocks while weighing on others. The so-called hyperscalers - the elite group of megacapitalization technology firms at the center of the artificial-intelligence boom - will likely benefit, as constraining the supply of computing power necessary to power and train AI models should help lift revenues for hyperscalers' cloud-computing businesses.

Smaller challengers including "neoclouds" like CoreWeave (CRWV), which rent out computing capacity, could have a much tougher time.

Similarly, the Democratic sweep also raises questions about whether semiconductor companies like Nvidia (NVDA) and Micron Technology (MU), as well as other beneficiaries of the AI buildout, will be able to hit the lofty revenue targets embedded in Wall Street's earnings forecasts for 2027.

"Our modeling suggests that even a modest slowdown in data-center pacing will cause semi revenues to undershoot the estimates," Pies added.

This was already playing out in markets on Wednesday, as shares of Alphabet (GOOGL), Microsoft (MSFT), Meta Platforms (META) and Amazon (AMZN) - the four main hyperscalers - rose, while semiconductor and neocloud stocks, along with shares of industrial companies that help in the AI buildout, fell.

The Fed

The election's impact on the AI buildout is probably the most consequential development for markets, particularly stocks. But the implications for Federal Reserve policy are also worth thinking about.

Treasury yields BX:TMUBMUSD10Y were declining on Wednesday, as bond traders reacted to both the election outcome and the Treasury Department's latest quarterly refunding announcement, which saw Secretary Scott Bessent again signal cuts to issuance of longer-dated Treasury notes and bonds.

Traders of interest-rate futures continue to expect another Fed interest-rate hike in December, according to data from CME Group. But the case for further hikes in 2027 was looking more tenuous, based on trading action in futures markets.

A Democratic-controlled Senate should also serve as a crucial firewall for the Fed by blocking Trump from installing loyalists on the board of governors should an unexpected vacancy arise, strategists at Rabobank said.

"There is only one governor whose term is set to end in the next two years - [former Fed Chair Jerome] Powell's tenure as Fed governor will conclude in January 2028," said Michael Feroli, an economist at J.P. Morgan.

Fiscal deadlines and debt-ceiling debates

One of the least surprising consequences of Washington's return to divided government will be that gridlock will likely once again become the norm for America's policymakers.

Jonathan Pringle at UBS pointed out that negotiations over government spending will likely become more fractious in 2027. That could lead to some short-lived volatility as the Dec. 11 deadline for a new spending package approaches. Republicans and Democrats will likely do battle over the debt ceiling at some point, too, although Pringle said he doesn't expect another deal to raise the U.S. federal government's borrowing limit until the second half of next year.

One thing that likely won't change: federal deficits. Pringle expects deficits to run at around 6.5% of gross domestic product in the years ahead as Democrats seek to water down or further delay cuts to nutritional assistance and healthcare subsidies that were passed as part of Trump's big budget bill in 2025.

While the fiscal impulse on GDP growth could diminish somewhat in 2027, Pringle said he expects this to be more of a 2028 story.

Will history repeat itself?

The period after a midterm election has historically been one of the strongest stretches for stock-market returns. Investors are already wondering whether history will repeat itself.

Here are a few interesting factoids, courtesy of Tom Essaye, founder and president of Sevens Report Research:

-- Since 1950, November has been the S&P 500's SPX second-best-performing month in midterm years, up an average of 2.7% and higher 79% of the time.

-- The three quarters that come after elections - the fourth quarter of the midterm year and the first and second quarters of the following year - have the strongest history of stock-market returns of the entire electoral cycle.

-- From 1930 to 2026, the S&P 500 never declined during the 12 months following a midterm election, with an average return of 14% - considerably higher than the S&P 500's historical average annual return of 10.5%.

Pies at 3Fourteen, for his part, believes there are other issues aside from seasonality that warrant investors' attention - chief among them whether the tech sector takes a slowdown of the AI buildout in stride.

-Joseph Adinolfi

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11-04-26 1412ET