Will there be a stock market crash if Democrats oust Trump?

The upcoming U.S. midterm elections on November 3rd for the House of Representatives and one-third of the Senate could create a paradox in the market. While some analysts initially viewed a Democratic victory as positive for limiting President Donald Trump's power, they now worry that the opposition could take full control of both chambers. According to the Polymarket prediction market, Democrats have a 92% chance of gaining the House majority and a 67% chance of winning the Senate.

If these results are confirmed, the expectation is that the U.S. stock market may experience a correction due to concerns about the opposition imposing regulatory hurdles on artificial intelligence development, limiting government spending, and launching investigations into multiple companies and sectors. This potential blockage could lead to an even more aggressive use of executive orders by Trump to impose new tariffs or escalate the conflict in Iran.

However, some financial quarters believe that the impact might be short-lived, with sales in the S&P 500 expected to be brief. Citi notes that the Congress' powers are limited in certain areas, such as AI and data center regulation, so the stock market rally should not be significantly affected. However, specific sectors that rely heavily on general spending may notice the political change.

Société Générale highlights that the healthcare sector in the U.S. stock market has risen by 25% in the past six months, while defense stocks have dropped by 5%, as Democrats might spend more on medicines and less on weapons.

Semiconductor stocks are awaiting the election's effect on AI. Morgan Stanley suggests that sectors that have surged this year, such as technology and energy, could face setbacks due to increased regulatory scrutiny or potential cuts in government support. Overall, the most favorable scenario for the market would be a two-year standoff between the White House and Congress without significant damage until the 2028 presidential elections.

Morgan Stanley analysts suggest that a divided government often helps markets since political gridlock makes large legislative changes less likely in taxes, regulation, and public spending.