J.P. Morgan Analyzes the 2026 Midterm Elections: Politics Will Amplify Volatility, but U.S. Stocks Are Really Trading on Interest Rates and Fundamentals

Original Title: 2026 Midterm Elections
Institution: J.P. Morgan Asset Management / Market Insights
Data as of: September 18, 2026

Editor’s Note: As the 2026 U.S. midterm elections approach, market discussions are shifting from "Can the Republicans hold Congress?" to "What will the election results actually change?" As of mid-September, the Republican majority in both houses is relatively limited, and the possibility of a return to a divided government makes fiscal policy, tariffs, regulation, and presidential appointments political variables in asset pricing once again. However, as the consensus that "elections bring uncertainty" has emerged, a more fundamental question begins to surface: To what extent can political changes independently determine market direction, and how much of the so-called "election rally" is actually just a result of economic cycles, interest rates, and corporate earnings changes?

In the report "2026 Midterm Elections" published by J.P. Morgan Asset Management in September, the issue is dissected from three dimensions: electoral patterns, policy impacts, and historical market performance, with core data as of September 18, 2026. Rather than being a midterm election forecast, it attempts to answer a question more relevant to investors: how elections transmit through policy to ultimately affect asset prices.

In this report, J.P. Morgan effectively breaks down whether "midterm elections will affect U.S. stocks" into a set of more fundamental structural questions: Is congressional control sufficient to change fiscal and regulatory paths? Does historical midterm election weakness stem from political uncertainty or concurrent macro shocks? And when political risks eventually dissipate, what are the real variables that determine whether the market can continue to rise?

First, the way politics influences the market is shifting from "party labels" back to "policy transmission." In the past, investors could easily compare stock market returns under different parties and congressional combinations; however, J.P. Morgan warns that such statistics are difficult to interpret causally. What is more noteworthy in 2026 is that if a divided government occurs, fiscal expansion may face more constraints, and risks of government shutdown and debt ceiling negotiations may rise; however, in areas where the president has significant executive authority, such as tariffs, changes in Congress may not necessarily mean a synchronous policy shift. The same applies to AI regulation, where there are differences in policy focus between the two parties, but these differences will only enter market pricing after they genuinely alter corporate costs, investments, and earnings expectations.

Second, the report states that "midterm election years perform worse" does not equate to "elections cause market declines." Since 1937, the average total return of the S&P 500 in midterm election years has been about 9.2%, lower than the 13.3% in non-midterm election years, with higher volatility; however, the significant pullbacks in 2018 and 2022 coincided with the Federal Reserve's tightening cycle, while 2002 was during the adjustment phase following the tech bubble burst. Therefore, J.P. Morgan emphasizes that understanding these years requires more focus on the economic backdrop than the political backdrop. This means that while historical data can indicate that markets are more prone to volatility during election periods, it is insufficient to establish a stable "election---rise and fall" causal chain.

Third, the market is not just trading on election results, but on the dissipation of uncertainty itself. Historical data from 1982 to 2022 shows that the average return in the three quarters leading up to midterm elections is slightly negative, while the fourth quarter averages a 6.6% increase; more importantly, market improvements often begin less than a month before the voting date. This means that post-election trends cannot be simply understood as "directional trading after results are announced," but are closer to a re-pricing of risk premiums after various policy scenarios gradually converge.

Fourth, what truly weighs on the 2026 elections remains the macro cycle. J.P. Morgan places inflation, interest rates, fiscal deficits, and tariffs within the same analytical framework, essentially reminding investors that even if the congressional landscape changes, as long as variables such as growth, monetary policy, corporate earnings, and valuations do not change synchronously, the pricing logic of the market may not be rewritten. Another market analysis regarding the midterm elections similarly points out that monetary policy, labor markets, corporate profits, and valuations explain future returns better than which party controls the government.

If this report can be compressed into a single judgment, it is that midterm elections can create volatility and alter some policy constraints, but they do not represent an investment logic independent of the economic cycle. What truly needs to be observed is whether significant changes occur in fiscal, trade, and regulatory policies after the elections, and how these changes further transmit to inflation, interest rates, growth, and corporate earnings.

In this sense, the subject of this discussion is not just the 2026 U.S. midterm elections, but a more general market issue: when political events make headlines, what investors really need to identify is whether it is the event itself or the transmission mechanisms behind the event that can change the fundamentals.

The following is the original content (for ease of reading and understanding, the original content has been reorganized):

The U.S. midterm elections are often one of the times when financial markets are most easily attracted by political narratives.

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

These questions will certainly affect policy, but J.P. Morgan in its latest "2026 Midterm Elections" attempts to emphasize another point: historically, investors have often overestimated the explanatory power of "who controls Congress" on long-term market returns.

This report discusses the electoral patterns of 2026, policy changes under different congressional combinations, and the performance of U.S. stocks before and after previous midterm elections. However, the ultimate focus is not on politics, but rather on a more traditional asset pricing framework—monetary policy, fiscal policy, economic growth, employment, corporate profits, and valuations are usually more important than party combinations.

Both Houses Are Close, but What the Market Really Cares About Is Whether Policies Can Change

From the perspective of the election itself, there is indeed significant potential for congressional restructuring in 2026.

J.P. Morgan's statistics show that as of September 18, the Senate consists of 53 Republican senators, 45 Democratic senators, and two independent senators who vote with the Democratic caucus. For the Democrats to gain control, they need a net gain of 4 seats; the majority advantage in the House of Representatives is also very narrow.

However, this report does not equate "Congress changing hands" directly with "market logic reversing." Instead, it focuses on which policies will be constrained after changes in the congressional landscape and which policies can continue to advance.

For example, regarding fiscal policy, J.P. Morgan believes that if a divided government occurs, the space for further expanding fiscal deficits may face more limitations; at the same time, the risk of government shutdown in 2027 and debt ceiling negotiations at the end of 2027 to early 2028 may become market risk points again. Conversely, if the Republicans continue to control Congress, new budget coordination bills may still involve 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 must go through policy, which then transmits to deficits, growth, inflation, and interest rates.

Fiscal Policy May Be Constrained by Congress, but Tariffs and Regulation Do Not Solely Depend on Congress

This distinction is particularly evident in trade policy.

J.P. Morgan points out that in a divided government scenario, the president still has significant executive authority, so trade policy may not necessarily contract significantly with changes in congressional control. The report mentions that a new round of Section 301 tariffs and discussions related to the USMCA have re-entered the policy spotlight; as of September 18, the actual average tariff rate on U.S. consumer goods imports is approximately 10.6%.

In other words, changes in Congress may significantly affect fiscal legislation but may not equally restrict tariff policy.

Regulation may exhibit more direct policy differences. In the AI section, J.P. Morgan summarizes the Republican policy direction as lighter regulation, emphasizing global competitiveness and national security; Democratic policies, on the other hand, emphasize consumer protection, labor rights, privacy, and governance of misinformation. It is important to emphasize that this describes J.P. Morgan's summary of policy directions under the two government configurations and does not imply that specific regulations will necessarily be implemented according to this framework.

Therefore, from an asset pricing perspective, what is truly important is not the political labels themselves, but whether these policy differences are sufficient to change corporate costs, investment plans, profit margins, and macro inflation.

Midterm Election Years Are Indeed Weaker, but "Elections Cause Declines" Is Not Established

Historical data can easily create the impression that midterm elections are unfavorable for U.S. stocks.

J.P. Morgan's statistics show that since 1937, the average total return of the S&P 500 in midterm election years is 9.2%, lower than the 13.3% in non-midterm election years; the average actual volatility in midterm election years is also higher.

However, averages conceal a key issue: midterm election years often coincide with other more significant macro events.

In 2018, the S&P 500 had an annual total return of approximately -4.4%, and in 2022, it was about -18.1%. Both years happened to be midterm election years, but J.P. Morgan links market pressures primarily to the Federal Reserve's monetary tightening at the time. Similarly, 2002 was also a poorly performing midterm election year, during which the market was still digesting the burst of the internet bubble.

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

This is also a point that J.P. Morgan repeatedly emphasizes throughout the report: understanding historical market returns is usually more explanatory through the economic environment than the political environment.

The Real Seasonal Pattern Is Weakness in the First Three Quarters and Recovery in the Fourth

If one must find common characteristics of midterm election years from history, a clearer pattern emerges in the annual rhythm.

J.P. Morgan's statistics on the midterm election cycles from 1982 to 2022 show that the average price returns of the S&P 500 in the first, second, and third quarters of midterm election years are approximately -0.5%, -0.6%, and -0.1%, respectively, while the fourth quarter rises to +6.6%. Their statistics on the 100 trading days before and after elections also show that historical market improvements often do not begin on the day voting ends, but rather appear less than a month before the election.

J.P. Morgan explains this phenomenon as "the dissipation of uncertainty": before the election, the market needs to price multiple policy scenarios simultaneously; as the voting day approaches, possible policy paths gradually narrow, and the source of uncertainty from the election decreases.

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

2002 is a clear counterexample. Even after the midterm elections concluded, the fundamental pressures from the tech bubble burst still outweighed the factor of "political uncertainty disappearing." In other words, elections can end political unknowns but cannot end the economic cycle itself.

What Needs to Be Focused on in 2026 Is Still Inflation and Interest Rates

This framework is particularly evident this year.

In August, the U.S. CPI rose 3.4% year-on-year, with the core CPI rising 2.4%; among these, gasoline prices increased 3.9% month-on-month, contributing to more than one-third of the overall CPI increase for the month. Therefore, J.P. Morgan's report has re-listed energy prices, affordability, and inflation as important variables in the current macro environment.

Subsequently, the Federal Reserve raised interest rates by 25 basis points to 3.75%—4.00% at its September meeting. In the latest economic forecast, the FOMC's median projection for the federal funds rate at the end of 2026 is 4.1%, while it expects the annual PCE inflation to be 3.7% and core PCE to be 3.4%.

J.P. Morgan's data as of September 18 also indicated that the market had begun to factor in the possibility of another interest rate hike within the year.

This makes the market environment surrounding the 2026 midterm elections distinctly different from a simple "election trade": on one side are the changes in fiscal, trade, and regulatory paths brought about by congressional control, and on the other side are the already occurring inflation and monetary policy re-pricing.

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

This may also be the most valuable conclusion of J.P. Morgan's 22-page report: midterm elections may create additional volatility, but politics itself is not an independent asset pricing framework. Only when election results further change fiscal, trade, and regulatory policies and ultimately affect inflation, interest rates, growth, or corporate earnings does it truly become a market variable.

Therefore, to verify this logic moving forward, it is more worthwhile to observe not just single polls or seat changes, but whether energy prices and inflation can decline, whether the Federal Reserve's interest rate path continues to be revised upward, how fiscal space changes after the elections, and whether tariff and regulatory policies truly enter corporate earnings expectations.

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