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Underestimated Risks in the U.S. Midterm Elections?

The market is seriously underestimating the risk that the results of the U.S. midterm elections could be challenged, triggering political and legal disputes. At the same time, hedging costs on Wall Street have fallen to their lowest level of the year, and the implied volatility of S&P 500 put options for November has dropped below 15%, creating a low-cost window to buy protection early.

The probability that the election results could be disputed, or even spark political turmoil, is being severely underestimated by the market, and current pricing in the options market does not fully reflect this tail risk.

As the market calmed in August, the implied volatility of S&P 500 put options has fallen significantly from its July highs. The calmer the market, the cheaper protection becomes; but once election risk is truly priced into assets, volatility could rise rapidly, and the cost of hedging at that point would increase markedly.

The core logic is built on the current polling situation. Polls generally show Trump’s approval rating slipping, Democrats likely to regain control of the House, and Republicans expected to keep their Senate majority.

What the market is truly overlooking is not the election result itself, but the political and legal disputes that could emerge if the result is challenged. If the final outcome is unfavorable to Trump, the market is severely underestimating the likelihood that Trump would react strongly and challenge results in certain districts.

In that scenario, Trump may launch legal challenges to every “contested” district, delaying the certification process and triggering a wave of media coverage around disputes such as “what happens next” and claims that the election was “stolen.”

This political uncertainty could ultimately spill over into financial markets and drive volatility sharply higher. For markets, the most dangerous outcome is not necessarily that one side wins, but that the election result remains unconfirmed for an extended period, creating persistent uncertainty.

Add to U.S. technology stocks and gold on pullbacks; U.S. Treasuries are relatively lower in the order of priority. Is the September FOMC meeting the key turning point?

Recent pullbacks may create opportunities to add positions on dips. The key is: when will the turnaround happen?

If the FOMC meeting on September 16 results in a rate hike, the market may not expect further hikes afterward. It could start pricing in that “bad news is already done,” causing stocks and gold to first fall and then rise after the meeting. If September brings no rate hike, near-term rate-hike risk is directly reduced. Since the Fed had previously been strongly hawkish but took no action, it may further weaken policy credibility—an outcome that is more favorable for gold.

Judging by the event timeline, after the September FOMC meeting could be a rebound window with relatively high risk-reward. It’s advisable to focus on capturing that period. At the same time, given uncertainty around the U.S.-Iran situation and economic data, the market may also start a rebound before the FOMC meeting (for example, if Trump quickly ends the conflict, or if U.S. CPI comes in significantly below expectations, or other major policy adjustments). Trading should therefore remain flexible. Since the bull-market trend for gold and U.S. technology stocks has not changed, there’s no need to mechanically wait for one specific time node. If the market shows a clear pullback over the next few weeks, you can also consider gradually increasing allocations to stocks and gold even before the Fed meeting.

(1) Gold is still the clearest overweight direction. Whether the Fed ultimately pivots toward easing to improve liquidity, or recent policy missteps damage the dollar’s credibility, the medium-term logic for gold has not changed. Pullbacks can instead provide opportunities to add.

U.S. stocks can also be added on dips, especially the tech sector. The AI industry trend has not reversed. Recent adjustments are more driven by pressure from capital and sentiment rather than a fundamental deterioration in earnings. If policy and liquidity pressures ease, high-valuation assets may actually have greater rebound resilience.

(3) Don’t rush to bottom-fish U.S. Treasuries. In September, AI financing needs and the risk of rate hikes may continue to disturb yields on the long end, and certainty for long-dated bonds is lower than for gold and stocks. Rather than betting on a rapid decline in long-end yields, the stance in this report on U.S. Treasuries is more neutral; it’s better to patiently wait for policy risk and supply pressure to ease.

Dollar-cost averaging on dips with investment targets such as $BNB , $BTC, $ETH, $SOL, $SPCX, $AAPL, $TSLA, $NVDA, etc., are all solid trading strategies.
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