Insight Uncommon truths: Focus on the economy, not the politics

The US mid-terms produced a bigger than expected swing to the Democrats and a sharp drop in US equities. However, we think Congress will have limited ability to make big changes and prefer to focus on economic data which remains reassuring. 

Wow, that was quite a week in the US, with politics, economics and markets hitting the headlines. The outcome of the US mid-terms was at the same time unsurprising and shocking. It is usual for the party of the president to lose congressional seats in mid-term elections (see Figure 1a) and opinion polls had been pointing in that direction, especially concerning the House of Representatives (and this author suggested in early January that the Democrats could win both houses – see The Aristotle List).

However, the degree of the swing was bigger than most of us expected (though not excessive compared to the historical precedents shown in Figure 1a). As of 7 November (with some seats still undecided), the Democrats look as though they will hold a majority in the House of Representatives of 80-90 seats (they have a 254 vs 162 advantage, as of 7 November), while their Senate majority could exceed 10 (54 versus 44). That is impressive when compared to the pre-election Republican majorities of 3 and 6, respectively. 

That may look as though it gives the Democrats the opportunity to enact their legislative programme. However, even if they can agree what they want to do (and assuming they don’t go down the rabbit hole of impeachments), their ability to get things done may be limited. Though the US constitution does not mention the word “veto”, it effectively gives the president the power to stop legislation originating in Congress, unless two-thirds of both houses approve the bill: 

Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States: If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. (U.S. Constitution, Article I, Section 7, clause 2, as outlined in The Presidential Veto and Congressional Veto Override Process from the Center for Legislative Archives, National Archives and Records Administration). 

Impressive as the results were for the Democrats, they will struggle to get two thirds of votes (67 in the Senate and 290 in the House) without a good deal of Republican support. So long as Republican members of Congress don’t break ranks with the president, he will have an effective veto.

I imagine that some Republican members of Congress may break ranks with the president on topics such as the war with Iran, since its consequences have been so damaging to their standing. If so, I think that could be good news for financial markets, bringing with it the possibility of lower energy costs, inflation and bond yields (assuming the president bows to their wishes). 

However, I suspect it may be harder to garner Republican support for greater regulation of AI and datacentres. Hence, it is possible that the big post-election sell-off in global technology stocks may have been overdone.

That said, it is worth remembering that the problems for these stocks started well before the mid-terms. For example, as of 30 October, US hyperscalers were largely flat year-to-date, as were US neocloud stocks, which have halved since the middle of the year (judging by market-capitalisation weighted indices constructed by my colleague Ashley Oerth). Though the real regulatory risks may have to wait for the next presidential election (if a Democrat is elected), the markets were already worried that they had overpriced the very real potential that AI brings. 

When it comes to the history of asset returns around mid-term elections, Figure 1b shows that since 1990 US asset returns have tended to be better in the year after mid-term elections, than in the year of the election. This is not true for every election (2006, 2010 and 2014 were exceptions, for example) but it gives some comfort, especially for fixed income investors who have had a tough 2026. 

Of greater importance, I believe, will be the US economic cycle and Fed policy actions. From this perspective recent economic data flows were reassuring, with Q3 GDP particularly strong (+3.4% annualised), despite a 3.3% drag from net exports. In the most recent week, the ISM Manufacturing Index was reported to have strengthened to 55.5 in October (from 54.5), and, although the ISM Services index fell to 54.5 (from 54.9), both surveys suggest that businesses remain in good shape (though separate auto sales and construction spending data were weak). 

When it comes to the labour market, JOLTS job openings rebounded in September to 7.5 million (from 7.1 million), while layoffs declined. Challenger job cuts data also remained low in October, while the latest weekly initial jobless claims data was close to the lows of the last five years. Finally, the employment report for October showed a solid payroll gain of 165k, with a total upward revision of 84k across the two previous months, and unemployment fell to 4.1% (from 4.2%). 

Though wage growth was higher than expected (3.1% versus a Bloomberg consensus of 2.9%), it was down from the prior month. Figure 2 shows that the decline in unemployment since last November has not so far provoked a rise in wage growth (though it may no longer be falling). That is good news for the Fed, especially considering that strong productivity growth (due to strong GDP growth) pushed unit labour cost growth into negative territory in Q3. The Fed may feel the need to tighten again to prevent second round effects higher food and energy prices, but the November University of Michigan survey suggests that consumer inflation expectations are easing. 

I believe that if the economy remains this resilient, profits will continue to grow, while the Fed may not have to tighten as much as feared. I think that would overpower any mid-term effect during 2027, enabling another good year for small caps, for example. 

Unless stated otherwise, all data as of 6 November 2026. 

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