If the election results deviate from expectations, the market may still experience significant fluctuations.

Written by: Li Jia, Wall Street On Air

As the U.S. midterm elections enter the final sprint stage, Wall Street is increasingly viewing a "divided Congress" as the baseline scenario, believing that this outcome may represent a relatively mild policy conclusion in the current market environment.

According to Bloomberg, investors generally expect the Democratic Party to regain the House of Representatives in November, while the Republican Party will continue to control the Senate, but with limited advantages. The market believes this pattern will reduce the likelihood of significant policy implementation, forcing both parties into deadlock or seeking compromise on more issues, thereby easing policy uncertainty.

Stuart Kaiser, Head of U.S. Equity Trading Strategy at Citigroup, stated in a client report that a "divided government" will "force both sides into deadlock or seek compromise," leading to a moderation in policy choices, which "allows the stock market to focus on corporate and economic fundamentals."

At the same time, the market is also preparing for fluctuations before and after the election. Futures markets linked to the Chicago Board Options Exchange Volatility Index (VIX) indicate that demand for volatility protection against the S&P 500 index has significantly increased ahead of early November.

A Divided Congress May Be the Market's "Optimal Solution"

Historical data supports Wall Street's optimistic expectations. Data compiled by Carson Investment Research shows that, since 1950, when a Republican president is in office and Congress is divided between the two parties, the average annual return of U.S. stocks has reached 13.7%; in contrast, when Congress is controlled solely by either the Republican or Democratic party, the average annual returns are only 8.3% and 4.9%, respectively.

Brian Gardner, Chief Washington Policy Strategist at Stifel, said, "Investors are anticipating a divided Congress. If the outcome is indeed like this, with Democrats winning the House but not in an overwhelming victory, I think there may be a certain degree of a relief-driven rebound."

Artificial intelligence has also become one of the most watched topics in this year's midterm elections. As the rebound sentiment driven by data center construction continues to heat up, investors must confront the rapidly rising regulatory risks faced by this core technology that has driven the four-year bull market in U.S. stocks.

Under a divided government scenario, the likelihood of disruptive policy changes in areas such as artificial intelligence, defense, and healthcare will be significantly reduced, which is also the core logic behind the market viewing this as the "most positive outcome."

If "One Party Sweeps," the Market May Experience Severe Turmoil

However, the high consensus in the market regarding a divided Congress itself poses a potential risk—if the final results deviate significantly from expectations, the stock market may face severe turmoil.

It is not impossible for the Democratic Party to win both chambers. Although Trump remains the Republican Party's largest mobilizing force, his record low approval ratings are becoming a significant drag on the party. The Republican Party is hoping for a midterm election campaign informally dubbed "Trumpapalooza" to avoid repeating the terrible defeats of Trump's first term.

According to Bloomberg, a team led by Bank of America strategist Michael Hartnett pointed out last month that if the Republican Party performs strongly and Texas Governor Greg Abbott successfully wins reelection, it would provide a significant boost to AI-related trades; conversely, if the Democrats take the Senate and Abbott loses, the stock market will face "a significant drop."

Phil Wool of Rayliant analyzed that a Republican sweep would benefit sectors that would gain from further regulatory easing, with energy and finance being potential beneficiaries; while a "blue wave" formed by the Democratic Party could push renewable energy and healthcare providers to strengthen.

Institutions Prepare in Advance, Long-term Strategies Remain Dominant

Although the market is preparing in advance for the election results, not all institutions believe the midterm elections are sufficient to alter long-term investment strategies.

Omar Aguilar, CEO of Schwab Asset Management, stated that while political outcomes often make clients uneasy, the actual impact of most election results on long-term market trends is limited. He acknowledged that the short-term volatility of specific sectors will increase, but believes it should be seen more as an opportunity to adjust portfolios rather than a signal to change overall strategy.

"Clients are indeed paying attention, just as they pay attention to the $100 oil price," Aguilar said, "but does this mean they must change their strategy? Our advice is always: no, just stay the course."