S&P 500 performance in the 12 months following US midterm elections, since 1982. (Source: Bloomberg, UBS, as of November 2022)

The final outcome of the US midterm elections has yet to be fully revealed. But an expected “red wave”—a decisive Republican victory—has not occurred. Instead, the Republicans look set to gain a slim majority in the House of Representatives while the Democrats still stand a chance of retaining control of the Senate.

This ambiguous result looks likely to have an equally mixed impact on markets. A divided Congress, assuming this proves to be the case, would likely block further bold fiscal moves. Notably, this would include the potential for a windfall tax on oil and gas companies who President Joe Biden recently accused of “war-profiteering”. A long shot already, such a move would now be further out of reach.

History suggests that the greater political clarity that follows midterm elections—whatever the outcome—has tended to lift stocks. Since 1982, the S&P 500 has moved higher in the 12 months following the midterms on all 10 occasions—with an average rally of around 13.5%. But given stubbornly high inflation and the potential for continued central bank tightening, 2023 could be the first to break this trend.

With no decisive policy shift likely based on this outcome, Fed policy will remain the main driver of markets, in our view. The pace and peak in rates look set to remain the major preoccupation for investors.

We suggest investors avoid letting their political views impact their investment allocations and instead stick to their long-term plans. A further reduction in the probability of a windfall tax on oil and gas is a further positive for the sector, which we expect to be lifted by the rising price of crude.

For more on the US midterms, please see the blog, “Another election upends conventional wisdom,” published 9 November 2022.