Editor's Note: As the 2026 U.S. midterm elections approach, market discussion is shifting from "can Republicans hold Congress" to "what exactly will the election results change." As of mid-September, Republicans' majorities in both the Senate and the House are relatively narrow, and the possibility of Congress returning to divided government has made fiscal policy, tariffs, regulation, and presidential appointments political variables in asset pricing once again. But when "elections bring uncertainty" has already become consensus, a more fundamental question begins to emerge: To what extent can political change independently determine market direction, and how much of the so-called "election rally" is actually just the result of economic cycles, interest rates, and changes in corporate earnings?

In its September report "2026 Midterm Elections," J.P. Morgan Asset Management re-examines this question from three dimensions: the electoral landscape, policy impact, and historical market performance, with core data as of September 18, 2026. Rather than a midterm election forecast, it attempts to answer a question more relevant to investors: How do elections transmit through policy and ultimately enter asset prices?

In this report, what J.P. Morgan really does is break down "will the midterm elections affect U.S. stocks" into a set of more fundamental structural questions: Is congressional control sufficient to change the fiscal and regulatory path? Do historical midterm election weaknesses stem from political uncertainty, or from concurrent macroeconomic shocks? And, when political risk eventually fades, what are the variables that truly determine whether the market can continue to rise?

First, the way politics affects markets is shifting from "partisan labels" back to "policy transmission." In the past, investors could easily directly compare stock market returns under different parties and different congressional compositions; but J.P. Morgan cautions that such statistics can hardly explain causality. What is more noteworthy in 2026 is that if divided government emerges, fiscal expansion may face more constraints, and the risk of government shutdowns and debt ceiling negotiations may rise; however, in areas such as tariffs where the president has greater executive authority, changes in Congress do not necessarily mean policy will shift in tandem. The same applies to AI regulation—the two parties have different policy priorities, but these differences will only enter market pricing after they actually change corporate costs, investment, and earnings expectations.

Second, the report says that "midterm election years perform worse" does not equal "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 as well; however, the obvious drawdowns in 2018 and 2022 occurred alongside Federal Reserve tightening cycles, while 2002 was in an adjustment phase after the bursting of the tech bubble. J.P. Morgan therefore emphasizes that when understanding these years, the economic backdrop matters more than the political backdrop. The report means that historical data can show that markets are more prone to volatility during election periods, but it is not enough to establish a stable "election—rise and fall" causal chain.

Third, what the market trades is not just the election result, but the fading of uncertainty itself. Historical data from 1982 to 2022 show that the average return in the first three quarters of midterm election years was slightly negative, while the fourth quarter rose by an average of 6.6%; more importantly, the average market improvement often began less than a month before voting day. This means that post-election market action cannot simply be understood as "directional trading after the result is settled," but is closer to a repricing of risk premiums after multiple policy scenarios gradually converge.

Fourth, what truly weighs on 2026 above the election is still the macroeconomic cycle. J.P. Morgan puts inflation, interest rates, fiscal deficits, and tariffs into the same analytical framework, essentially reminding investors that even if the congressional map changes, as long as variables such as growth, monetary policy, corporate earnings, and valuations do not change in sync, the market's pricing logic may not necessarily be rewritten accordingly. Another of its market analyses on midterm elections also points out that monetary policy, the labor market, corporate profits, and valuations explain future returns better than which partisan combination controls the government.

If this report is compressed into one judgment, it is this: midterm elections can create volatility and can change some policy constraints, but they are not an investment logic independent of the economic cycle. What truly needs to be observed is whether fiscal, trade, and regulatory changes after the election are large enough, and whether they further transmit into inflation, interest rates, growth, and corporate earnings.

In this sense, the subject discussed in this article is no longer just the 2026 U.S. midterm elections, but a more general market question: when political events become headlines, what investors truly need to identify is the event itself, or the transmission mechanism behind the event that can change fundamentals.

The original content is as follows (the original content has been edited for easier reading and comprehension):

U.S. midterm elections are often one of the moments when financial markets are most easily drawn in by political narratives.

Which party will take the House? Will the Senate change hands? If there is a divided government, will fiscal stimulus weaken? And will regulation suddenly shift direction?

These issues will certainly influence policy, but J.P. Morgan in its latest "2026 Midterm Elections" sought to highlight something else: historically, investors have often overestimated how much "who controls Congress" explains long-term market returns.

The report discusses in turn the 2026 election landscape, policy changes under different congressional combinations, and the performance of U.S. equities before and after past midterm elections. Its ultimate focus, however, is not politics but a more traditional asset-pricing framework—monetary policy, fiscal policy, economic growth, employment, corporate earnings and valuations are usually more important than partisan combinations.

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

From the election itself, 2026 indeed offers significant room for congressional realignment.

J.P. Morgan's tally shows that, as of September 18, the Senate consisted of 53 Republicans, 45 Democrats and two independents who vote with the Democratic caucus, meaning Democrats would need a net gain of 4 seats to take control; the House majority advantage is similarly narrow.

But the report does not directly equate "Congress changing hands" with "a reversal in market logic." Instead, it focuses on which policies would be constrained after the congressional map changes, and which policies could still continue to advance.

Take fiscal policy as an example. J.P. Morgan believes that if a divided government emerges, the room for further expanding the fiscal deficit may be more constrained; at the same time, a 2027 government shutdown and debt-ceiling negotiations from late 2027 to early 2028 could once again become market risk points. Conversely, if Republicans continue to control Congress, a new budget reconciliation bill could still involve areas such as defense, housing and healthcare.

This shows that the election's impact on the market is not a simple chain of "which party wins → stocks rise or fall," but must pass through policy and then transmit to deficits, growth, inflation and interest rates.

Fiscal policy may be constrained by Congress, but tariffs and regulation do not depend entirely on Congress

This distinction is especially clear in trade policy.

J.P. Morgan points out that under a divided-government scenario, the president still has considerable executive authority, so trade policy would not necessarily contract markedly as congressional control changes. The report notes that a new round of Section 301 tariffs and USMCA-related discussions have already re-entered the policy spotlight; as of September 18, the effective average tariff rate on U.S. consumer goods imports was about 10.6%.

In other words, changes in Congress may significantly affect fiscal legislation, but may not necessarily constrain tariff policy to the same degree.

Regulation, by contrast, may show more direct policy differences. In its AI section, J.P. Morgan summarizes the Republican policy direction as lighter regulation, with an emphasis on global competitiveness and national security; Democratic-related policies place more emphasis on consumer protection, labor rights, privacy, and combating disinformation. It should be emphasized that what is described here is J.P. Morgan's summary of policy directions under two government configurations, and does not mean that specific regulations will necessarily land according to this framework.

Therefore, from an asset pricing perspective, what truly matters is not the political label itself, but whether these policy differences ultimately prove sufficient to change corporate costs, investment plans, profit margins, and macroeconomic inflation.

Midterm election years are indeed weaker, but "elections cause declines" does not hold

Historical data make it easy to form an impression: midterm elections are bad for U.S. stocks.

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

But averages mask a key issue: midterm election years often coincide with other, more important macroeconomic events.

The S&P 500's total return for all of 2018 was about -4.4%, and about -18.1% in 2022. Both years happened to be midterm election years, but J.P. Morgan mainly links the market stress to the Fed's monetary tightening at the time. 2002 was also a relatively poor-performing midterm election year, when the market was still digesting the bursting of the internet bubble.

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

This is also a point that J.P. Morgan's entire report repeatedly emphasizes: when understanding historical market returns, the economic environment usually has more explanatory power than the political environment.

The truly obvious seasonality is weakness in the first three quarters and a rebound in the fourth quarter

If one must look for common characteristics of midterm election years in history, the clearer pattern actually appears in the intra-year rhythm.

J.P. Morgan's statistics on midterm election cycles from 1982 to 2022 show that the S&P 500's average price returns in the first, second, and third quarters of midterm election years were about -0.5%, -0.6%, and -0.1%, respectively, before rising to +6.6% in the fourth quarter. Its statistics on the 100 trading days before and after Election Day also show that historically, market improvement often did not begin on the day voting ended, but had already appeared less than a month before Election Day.

J.P. Morgan explains this phenomenon as "the fading of uncertainty": before an election, the market needs to price multiple policy scenarios simultaneously; as voting day approaches, the possible policy paths gradually narrow, and the source of uncertainty that is the election declines accordingly.

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

2002 was a clear counterexample. At that time, even after the midterm elections ended, the fundamental pressures brought about by the bursting of the tech bubble still outweighed the factor of "political uncertainty disappearing." In other words, elections can end political unknowns, but they cannot end the economic cycle itself.

What truly needs to be watched in 2026 is still inflation and interest rates

This framework is especially evident when applied to this year.

In August, U.S. CPI rose 3.4% year over year, while core CPI rose 2.4% year over year; among this, gasoline prices rose 3.9% month over month, contributing more than one-third of the overall CPI increase that month. J.P. Morgan's report therefore re-listed energy prices, household affordability, and inflation as important variables in the current macroeconomic environment.

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

In data dated September 18, J.P. Morgan also pointed out that the market at that time had already begun to price in the possibility of another rate hike within the year.

This makes the market environment surrounding the 2026 midterm elections clearly different from a pure "election trade": on one side are changes in fiscal, trade, and regulatory paths brought about by control of Congress, and on the other side are inflation and monetary policy repricing that have already occurred.

The latter can directly change the risk-free rate, valuation discount rate, and corporate financing costs, and therefore has a more direct impact path on the broader market.

This may also be the most worthwhile conclusion to retain from 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 conditions, and ultimately affect inflation, interest rates, growth, or corporate earnings, do they truly become a market variable.

Therefore, to verify this logic going forward, what is more worth watching is not a single poll or seat change, but whether energy prices and inflation can fall back, whether the Federal Reserve's rate hike path will continue to be revised upward, how fiscal space changes after the election, and whether tariff and regulatory policies truly enter corporate earnings expectations.

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