Global stock market performance is driven by a myriad of factors, and political events are among the most important. Recent precedents include the Brexit vote in 2016, decisions taken by the Liz Truss government in 2022 and President Trump’s “Liberation Day” tariff announcements in 2025.
In the short term, policy decisions taken by governments can affect economic performance, and specific events, such as elections in key nations, can influence investor confidence. Market attention is about to turn to the political landscape once again. John Healey will deliver his first Budget as Chancellor of the Exchequer on 28 October, facing mounting pressure to stabilise the UK’s financial position amid rising gilt yields and growing welfare costs.
This article focuses on the US mid-term elections, due on 3 November, which may set the tone for the remaining two years of Donald Trump’s second term in office. Our view is that the result could have less impact on the outlook for global markets than energy prices and bond yields but may have a bearing on the pace of artificial intelligence (AI) roll-out.
US mid-terms
In the mid-term elections, seats in both the House of Representatives and the Senate are contested, and the result is widely viewed as a “half-time” vote of confidence, or otherwise, in the sitting president. In the post-World War II period, only twice has the president’s party gained House seats at a mid-term (Bill Clinton in 1998 and George W Bush in 2002), and opinion polls do not suggest that Donald Trump will join that list. Projections indicate that the Republicans are likely to lose seats in both chambers, potentially leaving the Democrats with a majority in at least one and possibly both.
If results follow the current polling, expect greater scrutiny of the administration’s plans, and policy decisions may face additional hurdles. This could affect controversial policies, such as the pace of roll-out of data centres, which could face greater regulatory oversight. AI expansion has been one of the primary factors behind US market returns over the past 12 months, so any change in the outlook for AI infrastructure matters to market sentiment. The expected outcome may well already be reflected in prices, so a result that surprises investors would carry more weight than one that matches the polls.
US finances
The mid-term elections come at a time when investors are scrutinising the size and pace of US government borrowing. Gross federal debt surpassed $40tn USD in August 2026, around 125% of US gross domestic product (GDP). The so-called “debt ceiling”, the maximum amount the US government can borrow, is not an immediate constraint but is likely to be reached again in 2027.
A split Congress (with the two chambers controlled by different parties) raises the risk of a stand-off over the debt ceiling, however it also makes new tax cuts and spending programmes harder to pass, which would slow the growth in borrowing that concerns investors. Smaller deficits are not unambiguously good, however, as government borrowing is one source of corporate profits.
Government borrowing is indeed one contributing factor to higher US government bonds yields as heavier debt issuance can raise the risk of higher inflation and increases the volume of long-dated bonds that buyers must absorb, which raises the extra return investors demand for lending over the long term (the term premium). It is not the only influence, however; as the US economy continues to outperform and higher energy costs, driven by the ongoing conflicts between the US and Iran and between Russia and Ukraine, have reinforced the expectation of higher interest rates as we head into 2027.
It is not just bond investors who need to be concerned, as higher bond yields can also create headwinds for global equities. Firstly, companies face higher costs to finance new bond issuance, and technology giants have borrowed significant sums over the past year to fund AI expansion.
Secondly, government bond yields set the risk-free rate of return, so as yields rise, investors may be swayed away from equities, which generally carry higher volatility and risk. The cause of the rise in yields affects how large this second headwind is: yields that rise because the economy is growing strongly come with higher company earnings, which offset part of the effect, whereas yields that rise because of higher inflation or term premium come with no such support.
Historical precedents
The third year of a four-year presidential term, which will be 2027, has often coincided with rising markets. It is not clear that markets will follow that trend this time, because direction continues to be set by corporate investment in AI infrastructure and the potential for future earnings it brings. A handful of mega-cap technology stocks continue to do much of the heavy lifting, offsetting weaker performance across many sectors of the US economy.
Market reaction
Politics often affects investor sentiment, and political decisions can impact the direction of global markets. With the UK Budget and the US mid-terms falling within a week of each other, political discourse may once again step into the limelight.
The US mid-terms are unlikely to change the direction of markets on their own. Markets may well have already factored in Democratic gains, and investors remain more focused on bond yields and energy prices, which are also a concern for US voters. The main channel through which the result could matter is AI infrastructure, where any slowdown in the roll-out could dent sentiment in a sector that has played a significant role in recent market gains. The risk is that results outside current expectations lead to higher volatility.
Two alternatives to the base case illustrate the point. In the unlikely event that Republicans retain control of both chambers, the AI trade could benefit from lower policy risk. A split Congress, with Democrats winning the House and Republicans holding the Senate, is more plausible and could increase the risk of political deadlock and intensify negotiations when the US debt ceiling is reached once again.
The FAS Investment Committee will take political factors into account when making tactical asset allocation decisions within the CDI discretionary managed portfolios. Speak to one of the team to discuss any aspect of the investment approach adopted by the Committee.
