US midterm election impact: What it means for investors in equities, bonds and gold

Democrats look set to retake the House and gain Senate seats. That makes President Trump's domestic agenda harder to pass. His tariff and foreign policy powers sit with the executive and stay where they are. For markets, it is the second point that carries more weight than the first.

J.P. Morgan Asset Management expected a muted reaction. It projected S&P 500 returns of -0.25% to +0.50% under a Democratic sweep and +0.5% to +1% under a divided Congress. Gridlock limits tax changes and deficit-funded spending and invites harder questions on borrowing. It does little about tariffs, which can continue by executive action, along with the uncertainty they bring.

US equities. Gridlock has historically proven to help equities by reducing policy uncertainty. The opening was negative anyway: S&P 500 futures fell 0.8% and Nasdaq futures 1.8%. Technology faces closer scrutiny on AI infrastructure and data governance, though a presidential veto limits how far Congress can go. We still favour buying technology on corrections, as AI investment demand has held up.


US bonds. Closer scrutiny of borrowing should ease Treasury supply and help longer-dated bonds. The 10-year yield has slipped to about 4.91%. The Fed matters more. It held at 3.75%-4.00% with two members voting for a hike and a further increase in December remains open given the inflation and resilient growth.

Dollar. Lower borrowing expectations and softer yields put downward pressure on the dollar, which should relieve other currencies. The index is near 101.4. Interest rate differentials and the Fed's outlook will decide whether the decline actually lasts.

Gold. A weaker dollar and persistent geopolitical risk both support gold. Escalation in US-Iran tensions or further uncertainty in Russia-Ukraine would add to a safe-haven demand. Elevated real rates may limit the upside. Gold’s role is long-term. It diversifies a portfolio and hedges against economic and political shocks and is not a short-term trade.

Emerging markets. The election reaches emerging markets through two channels: US yields and the dollar. Lower Treasury yields and a softer dollar improve their appeal, encourage foreign portfolio inflows and give central banks more room on monetary policy. Emerging market bonds stand to gain most. With less pressure to defend currencies, there is less need to hold interest rates at restrictive levels. The risks are specific: elevated crude oil and the possibility of further US tightening, which would reverse the dollar relief. Equities are a different case. Technology-led Asian markets, especially Korea, will follow AI earnings momentum, with political developments mattering less.

Rupee. A softer dollar could support the rupee in the near term. Renewed US tightening could reverse that. For India, crude oil prices, foreign portfolio flows and the balance of payments outlook matter more than the election result itself. A disruption to the Strait of Hormuz would hit energy security, inflation and the external balance together.

What to do. The direct market impact is limited, with gridlock restricting major domestic policy change. Trade protectionism and geopolitical uncertainty remain the real risks. Investors should not make any structural portfolio changes on election volatility. Four variables deserve attention: the Middle East developments and crude oil prices, Federal Reserve policy, the sustainability of the global AI investment cycle and the direction of US trade and fiscal policy.

The composition of Congress matters only through inflation, interest rates, liquidity, earnings and geopolitical stability, which is why it is not on the list.

The election might change the headlines. The Fed, crude and AI spending still set the prices.

(The author is Head - Investments & Products, Systematix Private Wealth)