Editor’s Note: As the 2026 U.S. midterm elections draw nearer, market discussions are shifting from “Can the Republicans retain control of Congress?” to “What will the election outcome actually change?” As of mid-September, the Republican majority in both the Senate and House remains narrow, and the possibility of a divided government once again bringing fiscal policy, tariffs, regulation, and presidential appointments back into play as political variables in asset pricing. While it is now widely accepted that “elections bring uncertainty,” a more fundamental question is emerging: To what extent can political changes independently determine market direction, and how much of what we call “election-driven markets” is merely a reflection of economic cycles, interest rates, and corporate earnings shifts?

In its September report, "The 2026 Midterm Elections," J.P. Morgan Asset Management re-examined this issue across three dimensions—electoral landscape, policy implications, and historical market performance—with core data as of September 18, 2026. Rather than serving as a forecast of the midterm elections, it aims to answer a more relevant question for investors: how elections translate through policy into asset prices.

In this report, J.P. Morgan truly breaks down the question of “whether the midterm elections will affect the U.S. stock market” into a set of more fundamental structural issues: Can control of Congress sufficiently alter fiscal and regulatory trajectories? Did historical underperformance during midterm elections stem from political uncertainty or concurrent macroeconomic shocks? And when political risks ultimately subside, what variables truly determine whether markets can continue to rise?

First, the way politics influences markets is shifting from "partisan labels" back to "policy transmission." In the past, investors could easily compare stock market returns under different parties and congressional compositions; however, J.P. Morgan cautions that such statistics struggle to establish causality. In 2026, greater attention should be paid to the possibility that a divided government may impose tighter constraints on fiscal expansion, increasing the risks of government shutdowns and debt ceiling negotiations; yet, in areas where the president holds significant executive authority—such as tariffs—changes in Congress do not necessarily imply synchronized policy shifts. The same applies to AI regulation: while both parties prioritize different aspects, these differences only enter market pricing once they genuinely alter corporate costs, investment decisions, and profit expectations.

Second, reporting that "midterm election years tend to perform worse" does not equate to claiming that "elections cause market declines." Since 1937, the average total return of the S&P 500 in midterm election years has been approximately 9.2%, lower than the 13.3% in non-midterm years, with higher volatility as well; however, the significant drawdowns in 2018 and 2022 occurred simultaneously with Federal Reserve tightening cycles, while 2002 was part of the adjustment phase following the tech bubble burst. J.P. Morgan therefore emphasizes that economic context is more important than political context when analyzing these years. This means historical data can indicate that markets are more volatile during election periods, but they are insufficient to establish a consistent causal link between elections and market movements.

Third, what is being traded in the market is not just the election outcome, but the fading of uncertainty itself. Historical data from 1982 to 2022 shows that the average return in the first three quarters leading up to midterm election years was slightly negative, while the fourth quarter averaged a 6.6% gain. More importantly, market improvements typically begin less than a month before election day. This suggests that post-election market movements cannot be simply understood as “directional trading after the outcome is confirmed,” but rather reflect a repricing of risk premiums as multiple policy scenarios gradually converge.

Fourth, the macroeconomic cycle remains the dominant force weighing on the 2026 elections. J.P. Morgan incorporates inflation, interest rates, fiscal deficits, and tariffs into a unified analytical framework, essentially reminding investors that even if the congressional landscape shifts, as long as variables such as growth, monetary policy, corporate earnings, and valuations do not change in tandem, the broader market’s pricing logic may not be rewritten. Another of their market analyses on midterm elections similarly highlights that monetary policy, labor markets, corporate profits, and valuations are more explanatory of future returns than which party controls the government.

If this report were condensed into one key takeaway, it would be this: Midterm elections can generate volatility and alter certain policy constraints, but they are not an investment thesis independent of the economic cycle. What truly matters is whether fiscal, trade, and regulatory policies undergo substantial changes after the election—and whether those changes subsequently impact inflation, interest rates, growth, and corporate earnings.

In this sense, the subject of this article is no longer just the 2026 U.S. midterm elections, but a broader market issue: when political events make headlines, what investors truly need to identify is the event itself, or the underlying transmission mechanisms that can alter fundamentals.

The following is the original content (slightly reorganized for easier reading and understanding):

U.S. midterm elections are often one of the times when financial markets are most susceptible to political narratives.

Which party will take control of the House? Will the Senate change hands? If a divided government emerges, will fiscal stimulus weaken? Will regulation suddenly shift?

These issues certainly influence policy, but J.P. Morgan, in its latest report "2026 Midterm Elections," seeks to highlight another point: historically, investors have often overestimated the extent to which "who controls Congress" explains long-term market returns.

This report sequentially examines the 2026 election landscape, policy shifts under different congressional configurations, and historical U.S. stock market performance around past midterm elections. However, its ultimate focus is not on politics, but on a more traditional asset pricing framework—monetary policy, fiscal policy, economic growth, employment, corporate earnings, and valuation—which typically matters more than partisan composition.

Both chambers are very close, but what the market truly cares about is whether policy can change.

From the election itself, there is significant potential for congressional realignment in 2026.

According to J.P. Morgan’s data, as of September 18, the Senate consists of 53 Republican senators, 45 Democratic senators, and two independent senators who caucus with the Democrats; Democrats need a net gain of four seats to gain control. The majority advantage in the House is similarly narrow.

However, this report does not directly equate a change in congressional control with a reversal of market logic. Instead, it focuses on which policies will be constrained and which can still proceed following the shift in the congressional landscape.

For example, in terms of fiscal policy, J.P. Morgan believes that a divided government could impose greater constraints on further expanding the fiscal deficit; meanwhile, a government shutdown in 2027 and debt ceiling negotiations at the end of 2027 through early 2028 could re-emerge as market risk factors. In contrast, if the Republican Party maintains control of Congress, new budget reconciliation bills may still address areas such as defense, housing, and healthcare.

This indicates that the impact of elections on the market is not a simple chain of “which party wins → stock market rises or falls,” but rather proceeds through policies, which then affect deficits, growth, inflation, and interest rates.

Fiscal policy may be constrained by Congress, but tariffs and regulations are not entirely dependent on Congress.

This distinction is particularly evident in trade policy.

J.P. Morgan noted that under a divided government, the president still retains significant executive authority, so trade policy does not necessarily contract markedly with changes in congressional control. The report highlighted that new Section 301 tariffs and discussions related to USMCA have re-entered the policy agenda; as of September 18, the actual average tariff rate on U.S. consumer imports was approximately 10.6%.

In other words, changes in Congress may significantly impact fiscal legislation but not necessarily restrict tariff policy to the same extent.

Regulation may exhibit more direct policy differences. In its AI section, J.P. Morgan summarizes the Republican policy direction as favoring lighter regulation, emphasizing global competitiveness and national security; Democratic policies, by contrast, place greater emphasis on consumer protection, labor rights, privacy, and combating misinformation. It is important to note that this description reflects J.P. Morgan’s归纳 of policy directions under two potential governmental configurations and does not imply that specific regulations will necessarily follow this framework.

Therefore, from an asset pricing perspective, what truly matters is not the political labels themselves, but whether these policy differences ultimately suffice to alter corporate costs, investment plans, profit margins, and macroeconomic inflation.

Midterm election years are indeed weaker, but it’s not accurate to say that elections cause declines.

Historical data may create the impression that midterm elections are unfavorable for the U.S. stock market.

According to J.P. Morgan, since 1937, the S&P 500 has delivered an average total return of 9.2% during midterm election years, lower than the 13.3% average in non-medterm election years; average realized volatility has also been higher during midterm election years.

However, the average masks a key issue: midterm election years are often accompanied by other more significant macroeconomic events.

In 2018, the S&P 500 posted a total annual return of approximately -4.4%, and in 2022, it was approximately -18.1%. Both years coincided with midterm election years, but J.P. Morgan attributed the market pressure primarily to Federal Reserve monetary tightening at the time. 2002 was another weak midterm election year, as markets were still absorbing the aftermath of the dot-com bubble burst.

Therefore, simplifying these years as "because of midterm elections, the stock market performed poorly" actually confuses correlation with causation.

This is also a point repeatedly emphasized throughout J.P. Morgan’s full report: when understanding historical market returns, economic conditions typically offer greater explanatory power than political conditions.

The most evident seasonality is weaker performance in the first three quarters and a recovery in the fourth quarter.

If one must look for common characteristics in midterm election years from history, a clearer pattern emerges in the timing within the year.

J.P. Morgan’s analysis of midterm election cycles from 1982 to 2022 shows that the S&P 500 averaged returns of approximately -0.5%, -0.6%, and -0.1% during the first, second, and third quarters of midterm election years, respectively, rising to +6.6% in the fourth quarter. Its analysis of the 100 trading days surrounding elections also reveals that historical market improvements typically began less than a month before Election Day, rather than starting on the day voting concluded.

J.P. Morgan attributes this phenomenon to "the fading of uncertainty": before the election, markets had to price in multiple policy scenarios; as Election Day approaches, potential policy paths narrow, reducing uncertainty stemming from the election.

However, this can still only be understood as historical statistics and cannot be directly extrapolated as a market forecast for 2026.

2002 serves as a clear counterexample. Even after the midterm elections, the fundamental pressures from the bursting of the tech bubble outweighed the factor of “diminished political uncertainty.” In other words, elections can resolve political unknowns, but they cannot end the economic cycle itself.

In 2026, what truly matters to watch remains inflation and interest rates.

This framework has been especially evident this year.

In August, the U.S. CPI rose 3.4% year-over-year, with core CPI up 2.4% year-over-year; gasoline prices increased 3.9% month-over-month, accounting for more than one-third of the month’s overall CPI increase. J.P. Morgan’s report thus reclassified energy prices, household affordability, and inflation as key variables in the current macroeconomic environment.

Subsequently, the Federal Reserve raised interest rates by 25 basis points to a range of 3.75%–4.00% at its September meeting. In its latest economic projections, the FOMC median forecast for the federal funds rate at the end of 2026 is 4.1%, with full-year PCE inflation expected at 3.7% and core PCE inflation at 3.4%.

J.P. Morgan's data from September 18 also indicated that the market had already begun pricing in the possibility of another rate hike within the year.

This creates a market environment for the 2026 midterm elections that is distinctly different from a simple “election trade”: on one side, changes in fiscal, trade, and regulatory pathways driven by control of Congress; on the other, inflation and the repricing of monetary policy that have already occurred.

The latter can directly alter the risk-free rate, valuation discount rates, and corporate financing costs, thus having a more direct impact on the broader market.

This may also be the most valuable takeaway from J.P. Morgan’s 22-page report: midterm elections may generate additional volatility, but politics itself is not an independent asset pricing framework. It only becomes a true market variable when election outcomes further alter fiscal, trade, or regulatory policies—and ultimately impact inflation, interest rates, growth, or corporate earnings.

Therefore, to validate this logic, what deserves closer observation is not single polls or seat changes, but whether energy prices and inflation can decline, whether the Fed’s rate hike path continues to be upwardly revised, how fiscal space changes after the election, and whether tariffs and regulatory policies truly enter corporate profit expectations.