On November 3, the United States will hold midterm elections to Congress. The main question in these elections is whether President Donald Trump’s Republican Party can retain its majority in both chambers of Congress. Polls suggest that this outcome is unlikely. What could the election results mean for the markets, and how can investors prepare? Arbat Capital Managing Director Alexander Orlov explains.

The magic of midterm elections vs. the magic of 2026

U.S. midterm elections almost always become a kind of referendum on confidence in the president and the party he leads. U.S. stock market statistics (as shown in the chart) indicate that the year before midterm elections is usually the worst year for stocks in the entire four-year presidential cycle. By contrast, the year after the elections has historically seen spectacular rallies!

Additional statistics show that in U.S. midterm election years since 1974, the median return on the S&P 500 from August 1 to Election Day in November was 0%, Goldman Sachs previously calculated. In years without midterm elections, the index gained an average of 6% over the same period, according to BlackRock.

This might seem to lead to the logical conclusion that you should buy stocks on every market dip before, during, and immediately after the November 3 elections.

But in 2026, things are not going according to plan. Since the start of 2026, the S&P 500 has already risen 13%, despite the war in the Middle East and high oil and refined-product prices. The AI development theme has proved many times more important than geopolitics. As a result, the market’s direction after the elections will depend more on the trajectory of tech companies’ spending on chips and semiconductors.

And here, the election outcome turns out to matter more than it might seem at first glance.

Election scenarios

The base-case scenario, judging by the polls, is that the Democratic Party will regain a majority in the House of Representatives and secure a narrow majority in the Senate (60% to 40%, since only 35 of the 100 seats are up for election).

But there is also an alternative scenario in which the Republican Party manages to retain control of the Senate. Republicans currently hold 53 seats in the upper chamber of Congress, while Democrats hold 47.

Essentially, both outcomes have the same implications for markets: divided power between Congress and the president is more likely to be good news—especially with such an unpredictable president.

What does all this mean for the different market sectors?

For the stock market as a whole, there is one big caveat to a Democratic victory: their stance on AI, the main driver of the U.S. market.

The elections could puncture the AI bubble if the victorious Democrats continue to oppose Trump’s plans to allow the unrestricted construction of data centers and adoption of AI, and enshrine that opposition in law. However, the sitting U.S. president can always veto these legislative initiatives, and it is unlikely that either chamber would muster the two-thirds vote needed to override a veto.

In any case, such scenarios would be bad news for the AI segment and, through it, for the entire market. This would force investors to look for alternative sectors for growth.

The commodities market could change dramatically after the elections if a complete Democratic victory can bring the war in the Gulf to a halt. In that case, oil prices would plunge by 25–30%, while gold would rise slightly (de-escalation in the region would give the Fed room to cut rates, which could make gold somewhat more attractive).

But there is another scenario in which a Democratic-controlled Congress can only limit Trump’s willingness and ability to make concessions to Russia on energy issues. In that case, oil would remain expensive, and agricultural commodities would continue to rise in price (prices will also climb because of the El Niño climate phenomenon, which has become the strongest in several decades).

Metals—and especially precious metals—will react more strongly to the Fed’s interest rate, which is likely to remain high.

A Democratic victory would likely bring hope to the bond market that the growth of the national debt will slow and the operation in the Middle East will wind down. These are the two main conditions needed for the Fed to refrain from raising rates and for the rise in U.S. Treasury yields to come to an end. A possible collapse of the AI bubble in the stock market could also prompt investors to shift funds from overvalued stocks to undervalued government bonds.

But this positive scenario has a counterargument too: if Donald Trump becomes a “lame duck,” he may be even more inclined to take geopolitical risks in order to “leave his mark on history.” In that case, the bond sell-off will continue.

Currency market statistics show that elections do not, in themselves, change the direction of the dollar’s trend, whatever it may be before November. Clearly, in 2026, even a Democratic victory will not make Fed Chair Kevin Warsh abruptly change his stance and abandon his gradual fight against inflation, combined with minimal communication with the market.

The dollar will likely begin to weaken against a basket of currencies as Trump’s geopolitical adventurism subsides. In addition, investors may expect the Fed to ease monetary policy after the AI bubble bursts and the U.S. economy slows, potentially entering a recession in the second half of 2027.

What investors should do

Under both the base-case and alternative election scenarios, power in the U.S. will be divided for the next two years—Trump and the Republicans will most likely lose their total control over the country’s political agenda (though this does not apply to foreign policy, as the president has executive power in that area).

Given the Democrats’ tendency toward regulation, we can expect bad news for the AI segment of the stock market, the dollar, and oil prices, but good news for government bonds and gold.

This leads to the following suggestions for hedging election-related risks:

— buy U.S. government bonds;

— reduce positions in stocks of companies associated with AI. There is no need to close them out completely: it is hard to believe that strict regulation will be adopted anytime soon, tech companies’ capital expenditures are approaching $1 trillion, and a “market run-up” is also expected ahead of the Anthropic and OpenAI IPOs.

— the oil and gas sector could also be hurt by the Democrats’ actions, so it is best to exit stocks of companies in the sector altogether;

— in an equity portfolio, increase exposure to the consumer and healthcare sectors;

— the best way to bet on a weaker dollar is through the undervalued Japanese yen, not European currencies. Europe has even greater problems with its economy and debt markets, and a series of elections is also due there in 2027;

— buy gold (through ETFs or futures) and establish a protective options position in oil: buy a Brent put option with a $100 strike and sell a Brent call option with a $125 strike.

#WorldPoliticsNews , #MarketTurbulence

This article is not investment advice.