Cómo reaccionará el mercado a las ‘midterm’

The stock market's reaction to the upcoming midterm elections in the United States is a topic of interest, with the S&P 500 historically showing a positive return of 14.1% in the six months following these elections since 1970. In contrast, the average return over the same period for other years is 5.7%. BlackRock notes that the S&P 500 has seen a positive return 12 months after each midterm election since 1950, with an average gain of 16.6%.

Recent cycles, from 2010 to 2022, also displayed positive returns over 12 months. The Democratic Party is favored to regain control of the House of Representatives, and there is a high likelihood of them maintaining a majority in the Senate as well. A divided government between President Donald Trump and a Democratic-controlled Congress could limit the scope for new legislation until the 2029 presidential election.

BlackRock's data suggests that market returns are weaker when the party in the White House loses total control compared to when they maintain or share control of Washington.

Experts caution that this historical pattern should be approached with caution, as there has been no pre-election sell-off like in most midterm elections this time around, and the probability of the party in power losing total control appears to be the least likely scenario. However, the electoral calendar alone should not justify increasing exposure to the U.S. stock market.

Investment firms agree that neither party will solve the main issue facing the United States: its structural deficit. Fiscal expansion is expected to continue.

The upcoming elections will determine the trajectory of public spending, where artificial intelligence (AI) may play a significant role. The market anticipates that the U.S. Treasury will reach its legal debt limit of $41.1 trillion by 2027. BlackRock's CEO, Larry Fink, highlights that competition for capital is fiercer than ever in the United States.

Alexis Bienvenu, a fund manager at La Financière de l’Echiquier, notes that the true political challenge lies ahead in 2027, when new representatives must convince investors to continue financing the country at an affordable cost, given the fierce competition for capital, not just for votes.

Mirabaud suggests that the main limitation for the market is not political uncertainty but rather the combination of rising interest rates, persistent inflationary pressure, and demanding valuations in some market segments. If additional spending lacks adequate financing, stronger growth would be accompanied by broader fiscal deficits and increased U.S. Treasury issuance, according to analysts.

Raphaël Gallardo, a senior economist at Carmignac, believes that a combination of potentially stronger inflation expectations and higher U.S. bond yields could put additional upward pressure on long-term U.S. yields, potentially challenging the Federal Reserve's efforts to combat inflation.

While a Democratic victory may pose regulatory challenges for AI development, experts remind that Congress has limited powers in certain areas, such as AI and data center regulation. However, it can take more decisive action in sectors like healthcare, which has risen over 25% over the past six months. In contrast, the defense sector, more protected by Republicans, fell 5% during the same period.

Société Générale expects market volatility to initially increase as the possibility of stricter regulation becomes clearer, particularly in AI and banking. Neuberger also anticipates that the S&P 500 leadership may shift towards defensive sectors like commodities and healthcare, away from technology, semiconductors, industry, and finance.

S&P 500 options offer a slight risk premium for investing in the index over the coming days, mainly due to relatively minor events like the Fed's interest rate decision or the release of major tech company earnings, according to Barclays. Barclays notes that these data suggest a relatively moderate market reaction to the vote, but they highlight AI-related infrastructure as a key focus, as growing opposition to data center development, driven by energy costs, reliability concerns, emissions, water consumption, and broader community impacts, increasingly makes AI infrastructure a political issue.