Midterm Elections a 'Fundamental Non-Event' for S&P 500, Citi Says

The upcoming U.S. midterm elections in November are shaping up to be a “fundamental non-event” for the S&P 500, regardless of the outcome, according to a note from Citi released Wednesday.

Analysts at the bank told investors not to expect a meaningful impact on the index's fundamentals over the intermediate term, arguing that the Federal Reserve's policy decisions carry far more weight for the market's direction.

Election Outlook and Market Scenarios

Citi stated that current polling and prediction markets indicate a high probability of the House of Representatives flipping control, while the Senate remains a “toss-up.” The bank also noted it “would not be surprised by a Democratic sweep.”

According to the note, President Trump’s net approval rating is running below his first-term pace and is lower than that of Presidents Obama in 2014 and Bush in 2006, years in which both saw their parties lose control of a chamber of Congress. Citi pointed to weak approval ratings on inflation, the economy, and foreign policy as contributing factors.

Sector-Specific Considerations

While the broad market impact is expected to be minimal, Citi anticipates that certain sectors could be more affected, particularly in the event of a sweep by either party.

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• Semiconductors: This sector tends to prefer Republican control due to risks of AI-related legislation. However, Citi sees slim odds of new laws derailing the AI trade, citing the potential for a presidential veto.
• Consumer Discretionary: This has been the weakest-performing sector during the current term, facing headwinds from tariffs and high gasoline prices, the bank said.

A Democratic sweep could lead the market to begin pricing in policy risks for 2028, such as higher corporate taxes and the implementation of AI guardrails. However, Citi cautioned that such an outcome is not entirely negative for markets, as new legislation curbing tariff and war powers could be viewed positively by investors.

Context: Fed Policy Remains Key

Ultimately, Citi stressed that the election is likely to be a secondary concern for investors. The bank referenced the 2018-2019 period as a historical example, stating that the midterm elections then were a “relative sideshow versus the Fed.”

This suggests that investors should remain focused on monetary policy and macroeconomic data as the primary drivers of market performance, rather than the political landscape.