US Midterm Elections—Interpreting the Early Signs

It may seem premature to focus on the November US midterm elections. Polls will shift, economic data will evolve and unexpected events will reshape the political landscape in the months ahead. Still, the number of variables shaping the political outlook is growing, and US politics may begin to matter more for investors than it has for much of the year.

The death of Senator Lindsey Graham on July 11 temporarily reduced the Republican conference to 52 members, but on July 13 South Carolina Governor Henry McMaster appointed Graham’s sister, Darline Graham Nordone, to serve out the remainder of her late brother’s term. At the same time, Senator Mitch McConnell’s recovery from a serious fall leaves Republicans with a working margin of roughly 51–47 until he returns. Republicans still control the Senate, but the narrower margin leaves less room for defections, attendance issues or unexpected absences. That could complicate judicial confirmations, procedural votes and parts of the administration’s agenda, limiting the White House’s legislative flexibility.

The Senate isn’t the only source of uncertainty. Democrats entered this cycle needing a net gain of four seats to take control. In the House, 58 incumbents have already announced they won’t seek reelection, one of the largest turnover cycles in decades. Republicans account for 36 of those departures, 62% of the total.¹ That creates an unusually large number of open-seat races and weakens one of the party’s traditional advantages: incumbency. Many of those members are running for higher office rather than leaving politics altogether, but the result is a more competitive electoral map than many expected at the beginning of the year.

The economic backdrop has also become more uncertain. The latest escalation in the conflict with Iran adds another layer of risk to an outlook already shaped by tariffs, persistent inflation and uneven business and consumer confidence. Higher energy prices, if sustained, would reinforce those pressures into autumn. Those concerns also appear to be reflected in recent polling. President Trump’s overall approval rating has slipped into the 33% to 37% range across several surveys, while approval of his handling of the economy has fallen to roughly 33%.² Only about one-third of respondents approve of his handling of Iran, and even among Republicans, support has softened as inflation and energy costs remain elevated.³

None of these developments is likely to decide November’s outcome on its own. Collectively, however, they suggest that the operating environment facing the White House is becoming more challenging than markets anticipated only a few months ago. For investors, we believe the more relevant question is no longer simply whether Republicans retain power, but which policy assumptions remain durable under different political outcomes.

One scenario investors should increasingly consider is divided government, with Democrats taking the House while Republicans retain the Senate. For markets, the implications extend well beyond seat counts. A divided Congress would make major legislation harder to pass, raise the stakes around budget negotiations and shift greater emphasis toward executive authority in areas such as trade, tariffs, sanctions and foreign policy.

That distinction matters because several of this year’s investment themes have, to varying degrees, been supported by expectations that the current policy backdrop would remain broadly supportive. Digital assets have benefited from a more constructive policy and regulatory environment while financials have drawn support from expectations of lighter regulation, proposed reductions in capital requirements and a more favorable backdrop for consolidation. Expectations surrounding tax continuity, deregulation and the reshoring of manufacturing have also featured in the investment case for smaller, domestically oriented companies. Their recent performance, however, has been influenced just as much by interest rates and the broader earnings outlook.

That doesn’t necessarily imply a less favorable market backdrop; historically, markets have often adapted well to divided government. The issue is whether markets start assigning different probabilities to the policy assumptions underpinning these themes. Trade policy, tariffs, sanctions and much of foreign policy remain largely within the administration’s control. Tax policy, broader fiscal initiatives and key elements of the domestic legislative agenda don’t. As election season approaches, that distinction may become an increasingly important driver of sector and asset-class performance.