Policy, politics and portfolios: Making sense of the U.S. midterm muddle

With contributions from Noha Fazili, research analyst

Midterm mayhem or makeover?

On Nov. 3, U.S. voters will make their biennial trip to the ballot box for the 2026 midterm elections. This election will almost certainly be a referendum on Donald Trump’s second-term presidency, and, by extension, the Grand Old Party (GOP). Congress may be on the verge of a power shift—a “political realignment,” in Capitol Hill parlance.

As always, investors should brace for volatility and the barrage of market-moving tweets heading into the midterms. Yet after markets typically regain their footing as focus returns to the critical drivers of equity performance—corporate earnings growth, monetary policy and the broader business cycle. Rather than trying to game election outcomes in one’s portfolios, investors’ focus should remain on portfolio discipline, diversification and their long-term financial goals.

Will the polling gods be proven wrong once again?

In what may be an inauspicious sign for the Republican party heading into November, a new Focaldata-Financial Times poll released over the Labour Day weekend put President Trump’s approval rating at a record low. The survey found just under a third of Americans approved of the president’s job performance—a three-point drop from the previous month’s results. Most notably, Trump’s support has slipped within his own party: among Republicans, his approval fell two percentage points to just over 70 percent, a new low, according to the Financial Times.

Trump’s relatively lower approval ratings at this point in his second term compared with his first stem partly from a loss of support among Republicans and Republican-leaning independents. More broadly, however, the ratings reflect voters’ dissatisfaction with the Trump administration’s handling of key issues that will loom large on the ballot in November: affordability (read: inflation), soaring gas prices, the Iran war, immigration, and, more recently, the buildout of AI data centres.

Northern leverage: How the trade war is shaping voters’ perceptions

As U.S. voters look ahead to the midterms, we wonder how or if the escalating trade war with their Canadian neighbours may weigh on their choices at the ballot box. Trade talks collapsed in August, and the U.S. imposed 50 percent tariffs on more than US$20 billion worth of Canadian goods entering the U.S. Canada responded Sept. 8 with “dollar for dollar” retaliatory tariffs of 15 to 50 percent on an estimated $20 billion of American imports.

Many of the retaliatory tariffs imposed by Prime Minister Mark Carney’s administration will have targeted states known  “battleground” states in the midterms. While the trade war may not be the central issue for all voters, it feeds directly into the affordability crisis that ranks among voters’ top ballot-box concerns. The issue will prove especially pressing in states that have borne the brunt of the trade war with Canada, particularly border or near-border states. We suspect Republicans in these states may find themselves torn between loyalty to the president and mounting economic pressure related to the trade war, while Democrats waste little time seizing on trade and affordability issues as critical talking points on the campaign trail. 

Share of goods exports to Canada versus to the rest of the world in 2026 through July, by state

On a national level, Trump’s bellicose posturing toward one of the U.S.’s closest trading partners and allies has proven unpopular. According to an Ipsos poll released in early September  , only a quarter of American respondents support the harsh measures against their northern neighbours. Just one in five wants additional tariffs on Canadian goods.

We suspect the Trump administration’s swift move to escalate the trade war stakes after Sept. 8 will not help Republicans in these battleground states. Five new orders—including a complete ban on Canadian alcohol, expanded 50 percent tariffs on new goods and restrictions on government procurement—are due to take effect on Sept. 29.

As always, a deal could be struck before the midterms—and not a moment too soon, as far as some Republicans are concerned.

Will Dems stomp the House? Is the Senate math “mathing” for the GOP?

Congressional math matters. All 435 seats in the U.S. House of Representatives are up for grabs, while 35 of the 100 Senate seats are in contention. Of the House’s six non-voting members, five are also up for election.

In the current term, the Republicans control both chambers of Congress—albeit by a slim margin. In the House, the GOP holds a 218-212 majority, with four vacancies. The party can therefore afford to lose no more than two seats to the Democrats to maintain that narrow majority. Less favourably for Republicans, Ballotpedia counted 60 open or vacant House seats as of early September—37 of them Republican-held. If Democrats pick up even a handful of these, the House could very well flip in November.

The Senate, however, is a different story . The Republicans’ 53-47 edge is cushioned by favourable geography—more of the 35 seats up for election this cycle sit in red states than blue—and Democrats need a net gain of four to flip the chamber.

Historically, the incumbent party is most at risk during midterms

The congressional math notwithstanding, the past may be prologue. Looking across the 22 midterm cycles held between 1934 to 2018, the president’s party has typically come out the loser—dropping an average of 28 House seats and four Senate seats in each cycle. Gains for the governing party are rare: in only two of those midterms since 1934 did the president’s party actually add seats in both chambers.

The polls may simply reflect the usual ebb in voter sentiment toward the incumbent commander-in-chief heading into November. Yet we caution against relying too heavily on the polls or on history, as much can change in a few short weeks. If recent history is any guide, there are more than a few precedents of President Trump defying expectations.

Mopey midterm markets

Investor anxiety heading into U.S. elections is understandable. These contests introduce uncertainty, and this time is no exception—we should brace for market volatility. That volatility is typical: campaign rhetoric ratchets up, and a flood of economic promises and political soundbites overwhelms the news, social media and our psyches. Yet it tends to subside after elections, as investors look past the short-term noise and refocus on the critical long-term drivers of the market: corporate earnings, interest rates and economic growth. Put differently, elections come and go—and many campaign promises are diluted if not broken or forgotten, over time. Pushing through meaningful, transformative legislation with profound economic impact is a challenging feat in a four-year term, let alone half of one. 

A reflection of this dynamic can be seen in the historic returns of the market over a four-year presidential term. Since the 1930s, U.S. equity performance in the midterm years tend to be the weakest of the presidential term, with a robust rebound in markets in the subsequent year.

Midterm election years tend to be weak, but the following year is typically strong

S&P 500 performance during the four-year presidential cycle since 1932

Donkey versus elephant—the lame duck debate

Election cycles tend to be rife with conjecture regarding which party better serves markets and the economy. Typically, the facile supposition is that  Republicans are a boon for the economy (think: lower taxes, deregulation and fiscal discipline), while Democrats have a less potent economic agenda (think: higher taxes, more regulation and increased government spending). Historical analysis, however, tells a different story: it depends. The interaction between the occupant in the Oval Office and the congressional makeup on Capitol Hill appears to be the more meaningful driver of market behaviour.

Historic analyses of elections since the 1950s reveal that markets perform strongly under Democratic presidents when Congress is split or Republican-controlled. Investors likely favour the cheques and balances a divided or Republican-controlled Congress imposes on presidential power, which slows policy changes or creates gridlock. Unfettered Republican administrations with pro-business agendas attract investor favour because supply-side policies typically reduce income taxes and increase corporate profitability.

Elephant or donkey—or both?

Average annual S&P 500 returns since 1953 by party control

We caution against drawing broad conclusions from this analysis. The sample size is small, and the “why” tends to matter more than the “what.” The market corrections of 2018 and 2022, for instance, resulted from tariff shocks, Federal Reserve rate hikes and the Russia-Ukraine war as much as from the election calendar.

Could a “blue sweep” rein in this president?

Yes and no. In theory, if Congress goes blue (i.e., Democrat), the new leadership can constrain the president in several ways. Congress controls the government’s purse strings and can refuse to fund the president’s initiatives or block legislation needed to implement or fund his policies. POTUS may also struggle to appoint key positions—such as federal judges, Supreme Court justices and cabinet members—since the Senate must approve these appointments. Lastly, and more contentiously, Congress has the power to launch investigations, and the House can vote to impeach the president or cabinet secretaries for misconduct.

Even with a Democratic sweep, however, there are limits on congressional power conferred by the U.S. Constitution. For example, while Congress can pass its own laws, the president has veto power, which can only be overridden with a herculean two-thirds majority vote in both chambers. And lest we forget, the president can also use executive orders to bypass Congress on key issues including immigration, national security and defence—and, unfortunately, even naming bodies of water.

President Trump has a particular penchant for issuing executive orders. His use of such presidential power in his second term has been unprecedented in modern American history . Within the first 100 days , Trump signed more than 140 orders—far surpassing former President Joe Biden’s previous high of 42 and Franklin D. Roosevelt’s 1933 record of just over 100. As of Sept. 17, 2026, Trump has signed just over 280 executive orders in that term alone—far exceeding the 220 orders from his entire first term.

Washington is messy—your portfolio doesn’t have to be

As in every U.S. election cycle, conditions remain fluid and could shift overnight. We expect markets to face the classic tension between political friction and economic fundamentals. We are optimistic and lean into the market volatility heading into the election. Over the long term, from a portfolio perspective, we maintain our view that time in the market beats timing the market.

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