Market Update: Midterm Elections and Their Impact on Markets

Starting in January 2027, the United States will operate under a divided government, with Democrats controlling both the House of Representatives and the Senate, and Donald Trump holding the presidency for Republicans. Because Democrats fell well short of the two-thirds supermajority required to override a presidential veto, their ability to enact major policy changes into law will be very limited.

What policy changes are expected over the next two years?

Democrats are expected to advance legislation directly challenging the administration’s agenda. These efforts are likely to focus on trade policy (tariffs), tax policy and regulation. Despite these efforts, however, most policy changes regarding trade and taxation are highly unlikely to pass a presidential veto.

Initiatives that have a higher likelihood of receiving the president’s signature over the next two years include “must-pass” packages, such as government funding and defense appropriations. Because both sides will need to avoid government shutdowns, any enacted laws will require significant cross-party negotiations and compromises.

Initiatives that Democrats may put forth, which are likely to be vetoed over the next two years, include the following:

• Trade Legislation
  Any legislation aimed at rolling back existing tariffs faces a near-certain presidential veto. Because Democrats lack the two-thirds supermajority required to override a veto, sweeping statutory changes to lower import duties are highly unlikely to become law.
  
  Despite the near-certain veto, Democrats plan to advance legislation that serves as a policy blueprint for the 2028 general election. Key proposals include removing specific tariffs applied to allies like Canada and amending or repealing statutes that grant the president broad unilateral trade powers.
   
• Technology Legislation
  The environmental footprint and data practices of the technology sector are emerging as major regulatory targets. Democratic proposals include developing an "Energy Star" equivalent program for AI tools and creating a fee-and-rebate initiative for data centers whose electricity usage is not matched by local clean energy generation. Committees are also likely to investigate major AI developers and tech platforms on matters related to cybersecurity, consumer data sharing and privacy.
   
• Financial Legislation
  The Democratic Senate majority is expected to heavily scrutinize the Federal Reserve and agency appointments to block any administrative efforts to deregulate the traditional banking or cryptocurrency markets.
   

Moving forward, the administration’s deregulatory agenda faces immediate pushback. While President Trump maintains substantial executive authority to advance deregulation, a divided government will heavily constrain any permanent legislative rollbacks over the next two years.

What impact will potential policy changes have on market sectors and the U.S. economy?

Based on early market reactions and analyst projections, a divided government with a Democratic-controlled Congress and the Trump administration in the White House will create targeted sector-level impacts. While major legislative overhauls are unlikely due to the president's veto power, congressional oversight, budget negotiations and regulatory scrutiny are expected to influence the following sectors of the U.S. economy the most over the next two years:

• Healthcare
  The healthcare sector is expected to be a primary beneficiary of a Democratic Congress. Analysts expect that Democratic control of both chambers will allow lawmakers to delay, reduce or reverse scheduled Medicaid reimbursement cuts to hospitals that were passed in recent legislation.
   
• Technology, AI and Data Centers
  The election results could introduce additional challenges for AI infrastructure investment, especially as newly elected state officials consider restrictions on data center development at the state level. While immediate federal restrictions on AI or data centers are unlikely to pass into law, increased bipartisan scrutiny over AI development, data privacy and data center energy consumption could weigh on investor sentiment.
   
• Aerospace and Defense
  Defense contractors are exposed to funding delays and heightened scrutiny as Democrats gain control over government appropriations. While outright cuts to the defense budget are not expected, lawmakers are likely to use budget negotiations to demand greater transparency regarding military operations and Pentagon spending. This creates a risk of delayed funding for major defense programs and foreign military assistance.
   
• Financials and Cryptocurrency
  The financial sector and cryptocurrencies could see the recent tailwinds of deregulation and limited oversight fade. A Democratic Congress may push back against supervisory rollbacks. Furthermore, crypto firms could now face renewed investigations into their business models, banking relationships and consumer protections.
   

What impact do the midterm elections have on investment portfolios?

Midterm election results may lead to short-term volatility as markets digest the results and expected policy change initiatives. Historically, equity markets have performed well in the one-year period following midterm elections. Furthermore, historical returns have shown that markets perform relatively well under a split government regime where “gridlock” makes it difficult for sweeping legislation or regulatory changes to be made.

Looking beyond policy shifts, it is important investors remain focused on what matters most for their long-term investment plan. Financial markets have performed well in various political environments and are shaped more by economic growth and corporate earnings than government policy. Current estimates indicate a blended earnings growth rate of mid-teens percent growth for the S&P 500 for 2027 and 2028.

Furthermore, U.S. economic growth is expected to remain resilient, with estimates for GDP growth to remain near the long-term rate of approximately 2% for the next few years. Stable employment and strong consumer spending will continue to support these estimates.

Ultimately, the structural forces driving the market — deficit spending, elevated but declining inflation, monetary policy, AI investment and corporate earnings — are relatively unaffected by the latest political shift. These factors will continue to help drive future growth in the quarters ahead.

We will continue to provide updates as facts and circumstances change. If you have any questions, please contact your Enterprise Wealth Advisor.

This report and the analysis contained herein were prepared exclusively by the Wealth Management division of Enterprise Bank & Trust and reflect our internal market views. 

Investments are: *Not FDIC insured *May lose value *Not financial institution guaranteed *Not a deposit *Not insured by any federal government agency.