Eighty years of midterm history shows that stocks generally thrive after a divided Congress, but Wall Street panicked within days. A busy corner of the market could break a streak that has never failed, and three signals will point in which direction…
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Voters gave Democrats the House and Senate in the November 3 midterm elections, so President Donald Trump will govern with a divided Congress starting in January 2027. Wall Street initially liked the result: The Dow Jones posted its biggest gain of the year the next day. Then the mood changed. The tech-heavy index plunged 5.56% on November 5 as investors began to price in stricter regulation of AI infrastructure. The VIX, Wall Street’s fear gauge, rose to 28.18 from 16.61 the previous session.
This development raises a question for investors. Eighty years of medium-term history suggests a good year ahead for stocks. This cycle could further test that record, as much of the market is now driven by a single theme.
A post-midterm winning streak that never stopped
The S&P 500 has risen in the 20 12-month periods since midterm elections since 1946, gaining 14.7% on average. Divided government makes little difference. In 16 of the 21 midterm elections since 1946, voters have sent the president a Congress controlled by the other party. The average 12-month return was 14.6% under divided government and 14.9% under unified government.
Today’s setup has the best track record of all. The nine cases of Democratic Congress combined with a Republican president produced an average S&P 500 gain of 16.2% over the following year. The blockage means fewer political shocks, a point Reuters reported traders were rejoicing in just after the results.
Why AI makes 2026 a different test
AI-related companies now make up more than 30% of the S&P 500, and Democrats could push for tighter regulation of data center electricity and water consumption. This pressure increases on its own. The Department of Energy projects that data centers could account for as much as 12% of U.S. electricity demand by 2028. Independent market monitor PJM Interconnection called data center load growth a “primary reason” for tight supply and high capacity prices on its network. Even without passing a law, a committee-controlled Congress can slow authorization through hearings alone.
Investors are already sorting out winners and losers. From Election Day until November 6, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) fell 2.53% while the Dow Jones Industrial Average SPDR ETF Trust (NYSEARCA:DIA) slipped only 0.94%. The heavy on technology Invesco QQQ Trust (NASDAQ:QQQ) is down 13.41% over the past month.
Macroeconomic fundamentals will prevail in the vote
Who controls Congress is just one factor. The economy grew at an annualized rate of 3.4% in the third quarter. The 10-year Treasury yield fell to 4.84% from 5.24% in early October, favoring growth stock valuations. The Fed’s target rate is capped at 4.00%. Households are the weak point: Consumer confidence from the University of Michigan fell to 48.1 in September, below the index’s recession threshold.
Keep the story in perspective. Samples are small and returns ultimately depend on earnings, interest rates and valuations.
Signals that will decide the next 12 months
For a diverse portfolio, the Democratic sweep has always been a good setup. The exposure that deserves a closer look is the AI concentration. Three signals matter most over the next two quarters:
- Which Democrats will lead the Energy and Commerce committees in January, and whether their first hearings will focus on data center electricity costs.
- Whether major cloud computing companies maintain or reduce their capital spending plans in their upcoming earnings reports.
- If the VIX falls back below 20. If the fear passes, the November sell-off was a repricing. If it remains high, AI business will have a political problem.
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