Why markets care about the election

Markets are starting to care about the 2026 midterm elections, which loom 10 weeks away and could rip full control of Congress from President Donald Trump and the Republican Party.

Democrats are favored to win at least one chamber of Congress come November, leading the generic ballot by roughly 6 percentage points according to FiftyPlusOne, a website that tracks poll results. A divided Washington would likely block lawmakers from passing any major non-bipartisan measures while turning the legislative branch’s most basic tasks into a drawn-out negotiation.

Analysts detailed to CNBC how a full or partial shift in power from Republicans to Democrats in Congress could affect the country’s capital markets. Potential outcomes include a lengthy standoff over raising the debt ceiling, more whipsawing executive actions and potential volatility if there’s a protracted wait for election results.

While divided government tends to temper federal government actions, that’s not always the case with President Donald Trump in the White House for the two years of the next Congress.

“One of the things you often hear is the market loves a divided government, and that usually means the extreme positions don’t get enacted,” said Ed Mills, managing director of Washington policy at Raymond James. “But what we have been cautioning is the biggest market moves from a policy perspective of the last two years have come from executive action.”

“After the midterms, if Democrats have a majority at least in the House, do you think that President Trump is going to work with Democrats more? Or is it more likely he’s going to get more aggressive on executive action? My bet’s on more executive action,” Mills said.

The most prominent of Trump’s market-moving executive actions is his tariff campaign, which drew on untested emergency authority to impose sweeping levies on a swath of countries. Although the tariffs imposed under the International Emergency Economic Powers Act were eventually ruled unconstitutional by the Supreme Court, they remained on the books for over a year and weighed heavily on markets. And Trump has been replacing the tariffs that were rebuffed with new ones using different executive authority.

Trump often touts stock market performance, with the S&P 500 most recently reaching a record high close on Aug. 13. JPMorgan noted in a June report that dating back to 1950, the S&P 500 has performed better under divided Congresses than with single-party control. The firm also noted that even if Democrats gain control of the Senate, Trump will remain in the White House and would prevent Democrats from advancing tax, climate or healthcare legislation.

Most financial institutions believe the U.S. will reach its debt ceiling of $41.5 trillion in midyear 2027, requiring Congress to authorize taking on more debt. If Congress does not, the U.S. would be unable to borrow to pay its obligations and could default on its debt.

Congress last raised the debt ceiling in 2025 as part of Republicans’ massive party-line tax cut and spending package known as the “One Big Beautiful Bill Act.” If Democrats win at least one chamber of Congress, most analysts agree it won’t be so easy to do it again because Democrats could use their opposition as leverage to get other policy changes.

“Split government can make the process of raising or suspending the ceiling especially contentious, though a blue wave could make the process less tricky,” said one recent report from TD Strategies, referring to the prospect of Democrats winning both congressional chambers. “While we ultimately expect the ceiling to be raised, we look for negotiations to go down to the wire.”

The scenario played out in the inverse in 2023, when Republicans captured the House while Democrats controlled the Senate and the White House. The House GOP, then led by Speaker Kevin McCarthy, R-Calif., demanded spending cuts in exchange for raising the debt ceiling and brought the U.S. to the brink of default.

A debt ceiling standoff can affect the market by increasing volatility and raising rates on Treasurys, said Molly Brooks, one of the authors of the TD Strategies report. That volatility intensifies the closer the U.S. gets to the “X-date,” or the point at which the Treasury Department would no longer be able to pay its obligations.

“I’m expecting it to be raised at some point. It’s just a question of when and how much volatility it increases in the near term while we get towards that,” Brooks said. “Treasury bills that will be maturing in that year will be at higher rates because these investors are requiring a higher premium on that debt, just because there’s some scenario or some odds that they think that they may not get their principal back if the government defaults at that exact point in time.”

Mills said he is also keeping an eye out for unusual market moves during a debt ceiling fight, such as a bond selloff.

“There’s been a perverse incentive at times that the worse the fight got, the better the yields on U.S. Treasurys were, like the very instrument that could default actually benefited … the traditional playbook around the debt limit is you don’t really have to worry about the Treasury market because it’s a flight to safety,” Mills said. “We’re always asking how it would be different this time, and it would be if the bond market sells off in anticipation of a debt ceiling fight, the market would pay much more attention to this one than it has the last several ones.”

Another outcome investors are watching for is a potentially contested or delayed election call, which could keep markets guessing over who will be in charge of Washington for the next two years.

Election night has grown especially contentious in the U.S. over the last several cycles, especially after Trump’s efforts to discredit his loss to former President Joe Biden in 2020. The president has also attempted to add new voter-ID requirements to vote this year, moves his opponents say are a pretext to undermine election results and restrict voter access.

While investors have largely not weighed in on the president’s efforts specifically, they have been loud and clear that a delay in declaring a victor could disrupt the market.

“Independent of the final outcome, one scenario that could become problematic for markets is the potential for election chaos,” the TD report read. “Recent Supreme Court decisions have reinforced states’ ability to count votes after Election Day and given that much of the swing in House seats may come in California, markets may not know the definitive winner for some time.”

“Generally, higher volatility would weigh on risky assets such as equities, and it could actually lead to slightly lower rates if you’re seeing a flight to quality move where people are reacting to more uncertainty and then putting their money into a safer government debt,” Brooks said.

Investors would much rather see a decisive victory for one side or another as soon as possible after votes are counted, Mills said.

“There is no desire to replay 2020,” he said, noting how control of the Senate took until Jan. 5, 2021 that election to be decided. “Even in the 2024 election, what I heard consistently from investors was their number one goal was for a clear outcome on election night.”