Midterm Musings: Why a Divided Washington May Be Good News for Investors

The 2026 midterm elections resulted in Democrats taking over leadership of both the U.S. House and Senate. Further, there were a number of state governorships that flipped from Republican to Democrat. At the federal level, we now have a split government with a Republican President and Democratic Congress. 

Our assessment of this year’s midterm results is that the immediate impact on the economy and asset prices will be muted. A divided government often leads to gridlock and less dramatic policy changes, an outcome that investors, who prefer greater predictability, tend to view positively.  Going forward, we expect a greater share of governing to occur from executive orders rather than legislation.

Two notable near-term stumbling blocks for legislators will arise from a budgetary standpoint. First, federal funding will expire on December 11th, an outcome that, if not resolved, could result in a government shutdown. Second, the federal debt ceiling is projected to be reached in early 2027, with extraordinary measures likely to delay the need to raise the debt ceiling until the summer of 2027. With growing concerns about fiscal restraint, the inability to navigate both items effectively could lead to a temporary increase in Treasury bond yields. 

As we think more granularly about policy changes stemming from the midterms, there are a few industries where we could see near-term policy changes impacting business fundamentals and investor sentiment. 

Health Care: Rising prescription drug costs are a concern for both parties, although their approaches to addressing them differ. This topic could prove to be a point of compromise with the potential to pass legislation to lower prescription drug prices. This would serve as a headwind for pharmaceutical shares in the short term. Alternatively, a democratic priority is increasing funding for the National Institutes of Health, which would benefit segments of the health care sector. 

Defense: The President has requested a 50% increase in defense spending. This is increasingly unlikely given the result of the midterm election. While the war in Iran will be a point of contention between the executive and legislative branches, areas of agreement could be reached around restocking the military arsenal. It may be harder, however, for the administration to achieve its funding goals for larger initiatives such as the Golden Dome missile defense system. 

Data Centers: Several local ballot measures to restrict data center development received support in Tuesday’s election. Further, multiple governor-elects have indicated they will impose moratoriums on future development. The moratoriums are unlikely to be permanent but rather tools to establish guidelines to ensure an adequate power supply, limit the impact on residential power prices, and strengthen policies to address environmental concerns. Further, we see an increased likelihood that additional taxes could be placed on data centers. In the near term, these headwinds could affect data center real estate and businesses that supply infrastructure for data center development.  However, we don’t foresee the midterm elections having a long-term impact on data center development. If anything, these measures could result in legislation that ultimately leads to a more sustainable roadmap for future development. 

Economy 

From an economic standpoint, in 2027 the U.S. will not have a repeat of the stimulus that supported it in 2026, in which actions such as the tax cuts from the One Big Beautiful Bill Act and tariff refunds were additive to economic growth. In the year ahead, the U.S. economy faces some mild headwinds stemming from higher interest rates and the resumption of tariffs, with Section 301 authorizations being imposed. These crosscurrents are independent of the election outcome, although there could be a mix of puts and takes from future policy, as items such as additional taxes on data centers could be offset by lower drug costs. 

Markets

Historical data suggests markets perform well following midterm elections. Not since 1938 have equity prices failed to rally, over the following six and twelve months, coming out of a midterm election[i]. We believe that business and economic conditions ultimately drive markets, not historical patterns, but these statistics support the view that election day serves as a clearing event, providing investors with greater clarity on policy path going forward. 

Conclusion

The outcome of the 2026 midterm election will influence the direction of policy as we move forward. However, a split federal government is unlikely to drive significant policy adjustments. Markets appreciate this as greater clarity improves investor conviction. With election uncertainty past, and one less cloud of uncertainty facing investors, we believe this creates a more constructive setup to close out 2026. 

[i] Source: Baird Strategas. 

Composition Wealth, LLC (“Composition Wealth”) is a registered investment adviser. Advisory services are offered only to clients or prospective clients where Composition Wealth and its representatives are properly licensed or exempt from licensure. This communication is for general informational purposes only and should not be considered investment, financial, tax, or legal advice. It should not be treated as a solicitation to buy or sell securities and does not consider individual investment objectives, strategies, tax status, or horizon. Please consult your own tax, legal and accounting advisors before making any related decisions.