S&P 500: Democratic Sweep May Bring Short-Term Turmoil, but History Favors Stocks

Markets face a rough few days after Democrats swept Congress. Then the S&P 500 is likely to surge.

Nobody on Wall Street was positioned for a wave this big. Flipping six Republican-held Senate seats, including Texas, South Carolina and Iowa, went well beyond what most portfolios had priced in, and AI stocks will take the worst of the adjustment.

Once the shock’s absorbed, though, investors are left with a Congress and a White House that can block each other but can’t do much else. Equities usually do well in that situation. We expect the S&P 500 to be well ahead by this time next year.

Some of the recovery is already under way. S&P 500 futures had clawed back from a fall of as much as 1.4% to trade 0.4% lower by early morning, and Nasdaq 100 futures recovered most of a 2.4% drop. Dip buyers were in within hours, and much of the money that bolted overnight is finding its way back.

History supports the view. The S&P 500 has risen in the 12 months after every one of the 19 midterm elections since 1950, gaining around 15% on average.

Companies hate guessing what Washington will do next. With both sides boxed in, the guessing stops, and boards start signing off on spending they’ve been sitting on.

Treasuries rallied as results came in, pushing the 10-year yield down six basis points to around 4.9%. Democrats won’t pass another round of unfunded tax cuts, and bond investors know it. The deficit outlook looks less alarming as a result, and yields will likely keep easing into 2027.

There’ll be wobbles when the debt ceiling comes up again. Even so, falling yields make stocks look cheaper, and they’re a big part of why the S&P 500 is set to climb.

The dollar slid broadly against major currencies while gold climbed. Higher yields and the promise of fresh stimulus were holding the greenback up, and both have gone. Further weakness looks likely. Gold, Bitcoin and emerging markets have historically benefited when the dollar softens.

Asia felt the blow first, with Japan’s Nikkei 225 plunging more than 4%. The region is heavy with chip and AI hardware stocks, so it was always going to. Over the coming months, lower US rates and a weaker dollar should draw money back into emerging markets.

AI infrastructure is the clearest loser. AI-linked shares led the overnight decline on fears Democrats will slow the data centre buildout, and 56% of voters said data centres were a crucial or major factor in how they voted.

Power bills became a voting issue, and the industry is going to pay for it. This Congress will want data centre operators to carry far more of the cost of new grid capacity.

Defence spending is heading for much tougher scrutiny. Investment banks have lost the deregulation push they were relying on.

Healthcare sits on the other side. Democrats are expected to restore enhanced Affordable Care Act subsidies and revisit Republican Medicaid changes, making hospitals and insurers the obvious beneficiaries.

If Washington goes after household costs, retailers and consumer staples gain as well. Cheaper mortgages help homebuilders, and utilities expanding the grid are where the investment will flow.

Energy has been the best-performing S&P 500 sector this year, up more than 53%, though oil prices fell sharply this week. Expensive fuel made energy the star of 2026 and helped cost Republicans Congress. Lawmakers won’t be going easy on the sector.

Once the dust from election night settles, markets are left with a government that can’t spring big surprises, bond yields heading lower and a weaker dollar boosting what US companies earn abroad.

Together, those are why the S&P 500 looks set to finish next year comfortably higher, with healthcare, consumer staples and grid builders doing much of the lifting while AI infrastructure lags behind.