Oil and Interest Rates Outweigh Midterm Election Risks for Stocks, Barclays Says

The upcoming U.S. midterm elections are expected to have a limited impact on equity markets, with the trajectory of oil prices and interest rates posing more significant risks for investors, according to a new report from Barclays.

Muted Election Impact Expected

Strategists led by Emmanuel Cau noted that while global equities are tracking typical pre-midterm seasonality, the ultimate market implications of the vote are likely to be "modest under either scenario." Barclays' base case is for a divided government, an outcome the bank believes will result in only incrementally looser fiscal policy.

While the report acknowledges that greater congressional oversight of sectors like technology, healthcare, and banks could generate headline-driven volatility, it does not expect a lasting impact on company fundamentals. According to Barclays, trade policy is also unlikely to shift meaningfully regardless of the election results.

Oil and Rates Take Center Stage

Instead of politics, "oil and rates likely hold the fate of equities," the strategists wrote. The report highlights that equity sensitivity to both factors has turned negative again, meaning that increases in either are now a headwind for stocks.

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Barclays also noted that higher yields and rising oil prices have been weighing on presidential approval ratings, which adds to overall policy uncertainty. This dynamic may incentivize the current administration to try and keep energy prices contained, the strategists suggested.

Market Outlook and Positioning

Global stocks have so far followed historical patterns, with the MSCI World index down approximately 3% from its summer highs, in line with the average drawdown seen before past midterm votes. "History suggests not to get too negative, as equities tend to recover by mid-October, so basically even ahead of the election day itself," the strategists said.

Against this backdrop, and with resilient earnings and cleaner investor positioning providing some support, Barclays recommends a "more moderate beta stance." The strategists advise a preference for banks, value stocks, and beneficiaries of capital expenditure, hedged with defensive sectors like telecoms and utilities, while remaining cautious on consumer exposure.