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Let’s get to the update!
Democrats are taking over the senate and the house. President Trump remains in office. That means divided government is coming.
The immediate temptation is to label this bullish or bearish. The better question is more specific: which policies can actually change, and how much of the political outcome was already priced in?
What history says about this exact setup
Start with the big one. The S&P 500 has been higher 12 months after every midterm election since 1950, 19 for 19, with an average total return of +18.8% (Shaker Investments, using First Trust/Bloomberg data, 1950–2022). Midterm years tend to be bumpy first. From January 1 to Election Day, the average drop was -16.2%. Measured from the midterm-year low, the average gain one year later was +36.5% (First Trust, 1950–2022).
The pre-election year that follows, year 3 of a presidential term, has been the strongest of the four-year cycle. LPL Research puts the S&P 500’s average gain at 17.2% in year 3, versus 4.6% in midterm years (1950–2022). Since 1950, the index has fallen in only two pre-election years, 2011 and 2015, both by less than 1% (Opening Bell Daily).
Divided government has generally been fine. S&P averaged +15% in the year after elections that left power split, versus +11.5% after single-party control (1980–2024).
But the exact mix we’re getting is history’s weakest. LPL Research has found that a Republican president with a Democratic Congress produced the lowest average returns of any combination, about 6.7% a year. That average is weighed down by the 2001–02 and 2008 bear markets under Bush, and also covers Eisenhower, Nixon and Ford. The sample is small and the context matters a lot.
What changes, and what doesn’t
A Democratic Congress could block legislation, negotiate spending, and increase oversight. Senate control also affects presidential nominations. But Democrats would not automatically be able to enact their agenda over a presidential veto, and executive authorities, including some tariff powers, would remain. Gridlock can limit sweeping policy changes, but budget standoffs are another possible source of volatility.
Iran, oil and inflation
Congressional control does not automatically end the conflict with Iran or normalize oil flows. September CPI rose 3.7% year over year, with gasoline accounting for more than half of the monthly headline increase.
The scenario to watch is oil: sustained disruption could keep fuel costs and inflation pressure high. A genuine improvement in supply could ease pressure on consumers, airlines and interest-rate-sensitive sectors. The EIA’s October outlook projected Brent at $105 per barrel in Q4 and $84 in 2027, but that forecast depends on supply recovering and is not a current spot quote.
