The magnitude of the Democratic victories in both the Senate and gubernatorial races was surprising and exceeded what many market participants appeared to be pricing. While the outcome is politically significant, investors should resist the temptation to view it as an immediate economic regime change.
History suggests markets have typically looked through midterm election results relatively quickly. Since 1938, the S&P
500 has never been lower 12 months after a midterm election, with an average gain of nearly 15% over the subsequent year. Historically, markets have tended to shift their focus back to the fundamentals that ultimately drive asset prices: economic growth, inflation, corporate earnings, interest rates and monetary policy.
That shift may happen quickly this cycle as well.
While the election changes the balance of power in Washington, it does not dramatically alter the economic backdrop overnight. A Democratic Congress can more effectively block legislation it opposes, but it cannot unilaterally enact a broad policy agenda under a Republican president. The result is divided government, which traditionally limits major legislative changes and can provide a degree of policy stability.
However, investors should be careful not to assume all gridlock is positive. Markets generally welcome divided government when it reduces uncertainty. They become less enthusiastic when it leads to debt ceiling standoffs, budget disputes, funding battles, investigations or prolonged political confrontation. The next 12 to 18 months may be less about which party won and more about how Congress and the White House navigate those issues.
See more: Debt Be Not Proud
The election may matter more in Austin than in Washington
One of the more underappreciated implications of this election is its potential impact on Al infrastructure.
Over the past two years, investors have debated the likely Al winners. The next debate may center on who pays for the infrastructure required to support Al.
The Al story is evolving from a semiconductor story into an electricity story.
While much of the focus has been on control of Congress, governors, utility commissions, grid operators and local regulators may ultimately have a greater influence on the pace and economics of Al infrastructure development. Data centers require massive amounts of power, water, transmission capacity, tax incentives and permitting approvals, most of which are influenced at the state and local level rather than in Washington.
Now a blue state, Texas sits at the center of this theme. Its business-friendly environment, available land and power infrastructure have made it one of the most attractive markets for hyperscale data-center development. However, the scale of planned investment is beginning to test the limits of existing power generation and transmission capacity.
Virginia offers a useful example of the risks. Northern Virginia's explosive data-center growth has already sparked political and community backlash. Rising concerns around electricity demand, grid costs, land use and taxpayer subsidies ultimately contributed to higher taxes and fees on data-center development, prompting several planned projects, including Amazon facilities, to be delayed, reevaluated or relocated.
At the federal level, the future of 100% expensing for capital equipment could become part of broader tax and budget negotiations. At the local level, a growing not-in-my-backyard, or NIMBY, movement is increasing scrutiny around
Sector implications
We believe the market impact is likely to be felt more at the sector level than at the broad index level.
Healthcare may be a relative beneficiary, particularly hospitals, Medicaid-exposed providers and life-sciences companies tied to research funding. At the same time, increased health care spending and coverage expansion could be accompanied by renewed pressure on drug pricing and Medicare Advantage reimbursement.
Financials may face a more challenging regulatory backdrop, particularly in consumer finance and payments. However, the sector's long-term earnings power will remain driven far more by interest rates, credit quality, loan growth and capital-markets activity than by election outcomes.
Energy presents a more nuanced picture. A Democratic Congress may favor preservation or expansion of renewable-energy incentives while applying greater scrutiny to traditional energy development. Yet commodity fundamentals, global supply dynamics and geopolitical risks will likely remain the dominant drivers of energy markets in the near term.
Defense spending is unlikely to experience a dramatic shift. A more probable outcome is a continued negotiation between Republican priorities around defense and Democratic priorities around health care, research funding and social programs. The composition of spending may evolve more than the overall level.
What investors should focus on
While the election will command most of the headlines in the near term, we believe investors should focus on several issues that will likely prove more important to long-term portfolio outcomes:
- The trajectory of inflation and interest rates
- Federal Reserve policy
- Corporate earnings growth
- The sustainability of the Al investment cycle
- Fiscal policy and debt-ceiling negotiations
- Continued competition for capital across the economy
The election has resolved one source of uncertainty, but it has not changed the broader investment environment. Inflation remains above prepandemic norms, interest rates remain elevated, government borrowing needs remain substantial and businesses continue investing aggressively in Al and infrastructure.
Ultimately, elections influence markets, but they rarely remain the primary market driver for long. Investors would be well served to recognize the policy implications while keeping their attention focused on the fundamental forces that are likely to shape returns over the coming year.
power consumption, water usage, tax incentives and the infrastructure costs associated with large-scale data-center projects.
The election is unlikely to change demand for Al. What it could change is how quickly infrastructure is approved, where it is built and who ultimately bears the cost.
Put simply, investors may be moving from a race to build better Al models to a race to build enough infrastructure to power them.
Fifth Third Wealth Advisors, LLC is a wholly owned subsidiary of Fifth Third Bank, National Association, and an investment adviser registered with the U.S. Securities and Exchange Commission (SEC) under theInvestment Advisers Act of1940. Registration as an investment adviser does not imply any level of skill or training. For detailed discussion of Fifth Third Wealth Advisors, LLC and its investment advisory fees, see the firm's Form ADV on file with the SEC at www.adviserinfo.sec.gov.
Investing involves risks, and you may incur a profit or a loss. Past performance does not guarantee future results.
Views expressed are those of FTWA as of Nov. 4, 2026, are subject to change and are not guarantees of future events. Forward-looking statements are based on assumptions that may not occur.
This article is for informational purposes only. Information contained in this article is from sources deemed reliable; however, we cannot guarantee the accuracy or completeness of all information. It should not be construed as personalized investment advice or a solicitation to purchase or sell securities. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment vehicle, strategy or product referenced in the material will be profitable or suitable for your particular investment situation. In addition, Fifth Third Wealth Advisors LLC(FTWA) has engaged affiliate to provide certain proprietary investment products and services. Such affiliated compensation arrangements create a conflict of interest by incentivizing FTWA to use these affiliated services and products over offerings from unaffiliated third parties.
Asset allocation, tax-sensitive investing and diversificationdo not guarantee a profit or protection against loss. It is important to understand that the information provided does not serve as a substitute for professional and personalized investment advice from Fifth Third Wealth Advisors or any other investment professional. If you have any questions regarding the applicability of any of the information presented to your circumstances,you are encouraged to consult FTWA.
FTWA does not provide tax or legal advice. Investors should, if appropriate, seek professional advice, including tax and legal advice.
FTWA offers tailored investment advisory services to high-net-worth individuals and institutional investors. Fifth Third Bancorp provides access to investments and investment services through its various indirect subsidiaries, including FTWA. Deposit and credit products provided by Fifth Third Bank, National Association. Member FDIC. Equal Housing lender. Insurance products aremade available through Fifth Third Insurance Agency, Inc. Insurance products are not offered in all states. Please consult with a Fifth Third Insurance Professional. Investments, investment services and insurance: AreNot FDIC Insured, Offer NoBank Guarantee, May Lose Value, AreNot Insured By AnyFederal Government Agency, AreNot ADeposit.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
© Fifth Third Wealth Advisors
More Innovative ETFs Topics >
