Why This Year’s Midterm Elections Could Really Matter to the Stock Market

For the last year and a half, decisions by the Trump administration have been a key driver of the stock market’s swings. That raises the stakes for this year’s midterm elections, where control of Congress could shift at least partially to Democrats, bringing more volatility to portfolios.

Given the potential of a split Congress—a Democratic majority in the House and a narrow Republican victory in the Senate—this November is “much more important for individual stocks, sub-industries, and sectors,” says Dan Clifton, a top-ranked analyst who leads Strategas’ Washington policy team.

With just over four months before Election Day, we checked in with Clifton about key races to watch, what they could mean for artificial intelligence and data center policy, and the ripples from the Iran war. Plus, he walks us through Strategas’ election-driven basket of stocks to follow, and how the outcome could affect financials, industrials, healthcare, and more.

Leslie Norton: What would a resolution of the Iran war mean for the Federal Reserve?

Dan Clifton: It makes it easier for the Fed to play the waiting game. The Fed raising rates into the midterms would only compound voter anxiety about affordability. After Kevin Warsh’s first meeting as Fed chair, the administration formally released what was in the memorandum of understanding for peace, and they began to say they’d remove this risk from the inflation picture.

So you’ll see overall inflation getting significantly better into the midterm elections. That gives the new chair space. The market is pricing in 1.4 rate increases for 2026. Before the war, it was pricing in two cuts. I think the Fed won’t have to raise rates in September, as the market expects. It’s contingent on the Strait of Hormuz remaining open.

Norton: What will voters think?

Clifton: The single most correlated variable for the number of seats a president’s party loses or wins in a midterm election is the President’s approval rating. Right now, it is 37%. He will probably lose control of the House of Representatives. So, at the very minimum, the administration was trying to get that gasoline price closer to $3 per gallon. We’re getting close, and it’s probably why they’ll continue to kick the can if there’s no permanent peace solution.

Data Centers and the Election

Norton: Data centers are a big issue for many communities. What will they mean for the midterms?

Clifton: In my 30 years of working in government policy and 20 years in financial markets, I’ve never seen a more important or substantive policy debate. This issue touches federal, state, and local policy and geopolitics, all the way down to the local farm in Iowa. It’s important because AI is viewed as the vehicle to get higher economic growth, since labor force growth has been shrinking, and it’s also at the center of the race for tech dominance with China.

The Trump administration basically said it was prepared to win the AI race, and that it would institute policy changes to accelerate the data center buildout. That includes 100% expensing of capital equipment and research and development. For the first time in US history, if you build a factory in America, you could write off 100%. But many AI data centers are being built in communities that worry about water, energy, and development, places that voted for Donald Trump. At the heart of it is affordability. Now Democrats have seized on this opportunity to drive a wedge between Republican policies and voters’ priorities.

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You’ll see Democrats talk about it this summer. It’s showing up at the state level. June 30 was the budget deadline for state governments. The four largest data center states—Virginia, Arizona, Texas, and Illinois—are all talking about restrictions. Texas is trying to find a more neutral way to do it. But Virginia, which has the most data centers, has now put a $600 million electricity use tax on them. This won’t be fatal for data centers, but those states are leading indicators.

Norton: Do they change the calculus for the midterms?

Clifton: The Democrats would take the House even if there were no such thing as AI and data centers. The House races will be determined in suburban, highly educated areas with fewer data centers, like Short Hills, NJ, or Orange County, California. The Senate is where you could see some real action. The issue has already come up in Maine, even with just a few data centers there. In Iowa, it’s an explosive policy issue, and I think both the Democratic and Republican candidates will need to take positions on it. It will probably come up in the Texas Senate race and the Ohio election. Those are four potential swing states that would put the Democrats over the top in the Senate, and data centers will be part of that narrative in those elections.

The Top Three Things to Watch in the Midterm Election

Norton: What top three things are you watching between now and November?

Clifton: One: Candidate quality will matter a lot in three states. In Maine, our sense is that the Republican incumbent, Susan Collins, is holding back opposition research until after the July 13 deadline for replacing a nominee. Is it disqualifying for Graham Platner? Will he be able to withstand it? That will be an important tell for the Senate. In Michigan, you have a very divided Democratic primary. You won’t get results till August. How the party heals itself after that race will be important. Texas has the same issue. Republicans just had a very divisive primary. Do the Republicans begin to unify, and what will be the standing of the Democratic candidate as he comes under attack from Republican opposition research? Those states right there will tell you who’s going to control the Senate.

Two: The Democrats are moving toward the more populist wing of their party, as the Republicans did in 2016. The Republicans believe this will give them ammunition to begin to nationalize the race away from Trump’s political standing to the larger issue of Democratic priorities. I’m skeptical that this message will resonate. Midterm elections are generally referendums on the incumbent president.

Three: The state of the economy. We’re seeing private-sector employment grow for the first time in three years. We’ve had negative real incomes. That’s created the dire political environment. Between now and the election, I expect real incomes and jobs to go up.

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Norton: Let’s talk about your election baskets. What are they?

Clifton: Every election cycle, Strategas creates election baskets to say what stocks will be impacted and how the equity market is pricing in the election. Historically, our baskets have been very good indicators of the results, and they’ve become more useful because political polling has gone so bad.

For example, on Election Day in 2016, the baskets projected a 45% chance of Donald Trump winning the election, which was very different from what the prediction markets or polling were saying. The baskets are extremely robust for presidential election years, but they’re also very useful for midterms. We have a portfolio that will do well and benefit from policy changes should the Republicans keep control of the House and Senate. We also have a Democratic sweep basket.

Stocks for a Split Congress

Norton: This year, you created a split government basket. What is it, and what’s it saying?

Clifton: This was the year to have three portfolios, given how close elections have been in the past. This basket will benefit if the Democrats win the House and the Republicans keep the Senate.

First are interchange-fee stocks like Mastercard MA and Visa V. Democrats and some Republicans want more restrictions on interchange fees [fees paid by merchants for card processing]. A Democratic House is likely to pass it. If you get a split government, it’s very unlikely that legislation will pass.

Financial services are one-fifth of the portfolio. It includes Capital One COF, because the president’s been talking about capping credit interest rates at 10%. That’s unlikely to pass if the Republicans keep the Senate. It also contains banks like JPMorgan JPM.

In industrials, we have defense and homeland security stocks. In a split government, you’ll have a deal on budget policy where defense rises, but less than in a Republican sweep. That would benefit Huntington Ingalls HII, which does shipbuilding, homeland security provider Axon Enterprises AXON, small-cap Kratos Defense & Security Solutions KTOS, and AeroVironment AVAV, a drone provider.

No matter who wins, we’ll have to do an infrastructure bill. We like traditional plays like Vulcan Materials VMC, Martin Marietta Materials MLM, Quanta Services PWR, and Mueller Water Products MWA.

We’ll probably see energy permitting reform to get energy more quickly to factories and data centers. The basket includes GE Vernova GEV, NextEra Energy NEE, Cheniere Energy LNG, Fluor FLR, and Clearway Energy CWEN.

In a split government, you’ll have higher National Institute of Health spending, which helps the life science tool stocks. There will probably be [a deal that benefits] health savings accounts, which are important to Republicans, and some delays in the Medicaid cuts passed in the One Big Beautiful Bill. The Medicaid beneficiaries would be Medicaid HMOs like Centene CNC and hospitals like Tenet Healthcare THC.

Then there’s the debt ceiling in 2027. Having to raise the debt ceiling with a split government changes the dynamics of the leverage. If the Democrats have complete control, they can use that ceiling and budget to get policy changes, like fewer cuts to food stamps and Medicaid, or more renewable energy spending.