Key Points
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Prediction markets overwhelmingly expect Democrats to retake the House of Representatives on Election Night.
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A congressional shake-up comes with sticking points that can prove detrimental to the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.
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However, history is also a two-way street that undeniably favors long-term-minded investors.
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Throughout the day, Americans from across our great nation have headed to the polls or mailed in their ballots to make their voices heard. According to popular prediction market Kalshi, as of 8:50 p.m. ET, the odds have skyrocketed to better than 99% that Democrats will retake control of the House of Representatives. Regardless of what happens in the Senate, President Trump would be working with a divided Congress come January 2027.
Based on what history tells us, a split Congress can significantly alter annualized return expectations for the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC).
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President Trump will likely be working with a divided Congress in the new year. Image source: Official White House Photo by Joyce N. Boghosian.
A worst-case scenario is unfolding for stocks
If prediction markets prove accurate and Democrats do retake one or both houses of Congress, President Donald Trump’s second nonconsecutive term will mirror his first. He’ll have had two years of full Republican congressional control in the first half of each term, and a divided Congress in the second half of both.
To some extent, congressional division is welcome by Wall Street. Political gridlock makes it virtually impossible to pass major tax and spending legislation. In other words, personal and corporate income tax law should remain unchanged for the foreseeable future.
But a congressional shake-up does have its sticking points. For instance, debt-ceiling negotiations would be far more challenging. Additionally, Trump’s desire to minimize the regulation of artificial intelligence would clash with Democratic lawmakers who favor much tougher oversight of the stock market’s top catalyst.
However, the biggest worry for investors comes from nearly a century of historical return data. A few years ago, online retirement planning site Retirement Researcher examined the average annual return of the S&P 500 from 1926 through 2023 under four political scenarios, yielding one outlier:
- Divided Congress with a Democratic president (15 years): 16.63%
- Unified Republican (13 years): 14.52%
- Unified Democrat (36 years): 14.01%
- Divided Congress with a Republican president (34 years): 7.33%
Statistically, no political scenario has produced less desirable returns for stock investors than what’s expected to unfold on Election Night. But this also isn’t the complete story.
Image source: Getty Images.
History is a two-way street that undeniably favors long-term optimists
While nearly a century of data points to lower average annual returns for the Dow, S&P 500, and Nasdaq Composite during President Trump’s final two years in the White House, investors are in better shape than this data suggests.
For starters, a 7.33% average annual return still (pardon the apropos pun) trumps the long-term average annual return of other major asset classes, such as commodities, real estate, and Treasury bonds.
Furthermore, Carson Group’s Chief Market Strategist, Ryan Detrick, notes that the six months following midterm elections have historically been exceptionally generous to investors since 1950, with November higher 19 of 19 times. In fact, the S&P 500 hasn’t been down in the six- or 12-month period following a midterm election over the last 75 years.
In other words, even though history shows that near-term returns may be tempered a bit as President Trump and a divided Congress learn to work together, the long-term outlook for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite remains as bright as ever.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
