U.S. markets heading into the Nov. 3 midterm elections are likely to be shaped more by inflation, Federal Reserve policy, tariffs and fiscal negotiations than by which party controls Congress, according to a late-September analysis from J.P. Morgan Asset Management.
The firm’s assessment, based on information available through Sept. 18, argues that election results affect markets only when they change the policies that feed into corporate costs, profit expectations, consumer demand and borrowing conditions. That places the focus on the macroeconomic backdrop already confronting markets, including a new Fed rate increase and inflation still running above the central bank’s long-run target.
J.P. Morgan Asset Management said its framework separates party control from the policy mechanisms that influence asset prices. A congressional majority can shape tax, spending and regulatory legislation, but the economic consequences depend on whether those measures alter growth, margins, financing costs or inflation.
That distinction could be relevant for cryptocurrency markets as well as equities. Digital assets have often traded in response to shifts in liquidity expectations and risk appetite, both of which are closely tied to interest-rate policy. The report does not make a forecast for bitcoin or other tokens, but its analysis places monetary conditions above election-night outcomes as a near-term market variable.
Narrow congressional margins leave divided government in play
As of Sept. 18, Republicans held 53 Senate seats, while Democrats held 45 seats and two independents who caucus with Democrats, according to J.P. Morgan Asset Management. Democrats would need a net gain of four seats to take control of the chamber.
The House margin was also narrow, making divided government a plausible outcome even if one party retains or gains control of a single chamber. Such an outcome could limit the scope for additional fiscal expansion by making major spending or tax legislation harder to pass.
The firm identified two future fiscal pressure points that could emerge under a divided Congress: the risk of a government shutdown in 2027 and debt-ceiling negotiations expected from late 2027 into early 2028. Both events have historically raised concerns over federal funding and Treasury-market functioning, though the report did not predict that either would occur.
A Republican sweep would produce a different legislative opening. J.P. Morgan Asset Management said another budget reconciliation package could address areas including defense, housing and health care. Reconciliation allows certain budget-related measures to pass the Senate with a simple majority, reducing the need for bipartisan support.
Tariffs remain more dependent on the White House
Congressional control may have less influence over trade policy than fiscal legislation. The president retains broad administrative authority to impose or adjust tariffs, meaning the direction of trade policy can remain relatively independent of the House and Senate balance.
J.P. Morgan Asset Management cited renewed attention to Section 301 tariffs and discussions related to the U.S.-Mexico-Canada Agreement. It estimated the effective average tariff rate on U.S. consumer-goods imports at roughly 10.6% as of Sept. 18.
Tariffs can influence markets through several channels. Higher import costs may raise prices for households and businesses, compress margins for companies unable to pass on costs, and complicate the Federal Reserve’s effort to bring inflation down. Those effects can reach rate-sensitive markets even when the initial policy decision comes from trade administration rather than Congress.
The report applied a similar approach to artificial intelligence regulation. Democrats and Republicans have different policy priorities around AI, but market consequences would depend on whether regulations materially change compliance costs, investment spending, competition or earnings forecasts for companies using or building the technology.
Inflation and rates set the immediate backdrop
The analysis placed particular emphasis on inflation data and the Fed’s response in the weeks before the election. August consumer prices rose 3.4% from a year earlier, while core CPI, which excludes food and energy, increased 2.4%, according to figures cited in the report.
Gasoline prices climbed 3.9% month over month and accounted for more than one-third of the monthly CPI increase, the report said. Energy-driven inflation can be volatile, but it can also affect household expectations and consumer spending if higher fuel costs persist.
Following that data, the Federal Reserve raised its policy rate by 25 basis points at its September meeting, bringing the federal funds target range to 3.75% to 4.00%. J.P. Morgan Asset Management said the Fed’s latest projections showed a median expectation for the policy rate of 4.1% at the end of 2026, alongside projected 2026 PCE inflation of 3.7% and core PCE inflation of 3.4%.
As of Sept. 18, markets were also pricing in the possibility of another rate increase later this year, according to the report. Higher policy rates can lift borrowing costs across the economy, affecting corporate refinancing, mortgage costs, business investment and valuations for assets whose prices rely heavily on expectations of future growth.
Midterm-year history shows rates can outweigh election results
Historical S&P 500 performance provides support for the report’s caution against treating midterms as a standalone market signal. Since 1937, the index produced an average total return of 9.2% in midterm-election years, compared with 13.3% in non-midterm years, J.P. Morgan Asset Management found. Realized volatility was also higher in midterm years.
The weaker average does not establish that elections themselves cause market declines. The firm pointed instead to the economic circumstances surrounding individual cycles. The S&P 500 recorded total returns of about negative 4.4% in 2018 and negative 18.1% in 2022, years when Federal Reserve tightening weighed on financial conditions. The 2002 midterm cycle unfolded during the post-dotcom market adjustment.
Its 1982–2022 sample showed average S&P 500 price returns of negative 0.5% in the first quarter of midterm years, negative 0.6% in the second quarter and negative 0.1% in the third quarter. The fourth quarter averaged a 6.6% gain, with improvement often beginning less than a month before Election Day.
That seasonal pattern offers context rather than a trading rule. The report’s larger conclusion is that the November vote will matter most where it changes the path of spending, taxes, trade, regulation or debt issuance. Until those channels become clearer, inflation readings and the Federal Reserve’s rate decisions are likely to remain the more immediate forces shaping risk-sensitive markets.
For deeper insight into elections, tariffs, and crypto, explore our outlook in this market analysis.
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