Gridlock remains the base case. Kalshi markets heavily favor outcomes in which Democrats control at least one chamber of Congress, reducing the likelihood of sweeping new legislation.
The strongest themes are bigger than one election. The AI infrastructure buildout and the return of U.S. manufacturing are being driven by capital spending, rising demand, and policy support.
Healthcare’s setup is improving. Gridlock limits the likelihood of major legislation, voters appear focused elsewhere, and recent medical breakthroughs could help lift sentiment toward the sector.
The year after a midterm election is the third year of the presidential cycle and has historically been the strongest year for stocks. Since 1943, the S&P 500 has produced an average price return of 15.9% in the third year; the average rises to 17.2% when a Republican president governs with a divided Congress, as would be the case if Democrats win either the House or Senate. That compares with 8.9% across all calendar years since 1940.1
President Trump has also repeatedly pointed to market gains as evidence of his economic stewardship. If divided government limits his legislative options, it is reasonable to expect the administration to lean more heavily on market-friendly executive action. The sample is limited and past performance is not predictive, but both the historical pattern and political incentives argue against treating this election as a reason to remain on the sidelines.
Third Years of Presidential Administrations Have Historically Been Favorable for Stocks
Average S&P 500 calendar-year price returns
Source: HB Wealth and Bloomberg, as of Sep 2026. Sample size for all third years from 1940 to 2023 is 21; sample size for third years with a Republican president and divided control of government is 9.
On Kalshi, pricing points to the type of divided government that markets have historically preferred. Each contract pays $1 if its outcome occurs, so a price of $0.10 is commonly read as an implied probability of roughly 10%. As of Sep 18, a Democratic sweep contract implied 58.0%, Democratic House and Republican Senate implied 31.8%, and a Republican sweep—the only outcome that does not produce divided government—implied 12.5%. These are market-implied probabilities rather than forecasts and can move quickly, but they reinforce a simple point: Investors are pricing in divided-government gridlock.
Kalshi Traders Expect Divided Government
Implied probabilities for control of Congress in 2027–28
Source: Kalshi daily contract-price history through Sep 18, 2026
Legislative activity often slows in the two years leading into an open presidential election. The wide-open 2028 race could begin within weeks of the midterms, pulling attention toward campaigns and away from lawmaking. Congress will still act, but targeted executive and agency action may carry more weight than broad legislation.
Considering this backdrop, we believe three areas deserve particular attention.
AI is becoming an increasingly important economic and political issue. The U.S. wants to lead the global AI race, while data center investment can support jobs and economic growth. At the same time, policymakers and communities are raising concerns about cyber risk, model alignment, and the local impact of data center development. The industry is attempting to get ahead of some of these risks: Anthropic CEO Dario Amodei has called for “pacing the frontier” as models approach potentially dangerous capabilities. Competitor OpenAI has endorsed a similar approach for cyber-critical systems, while Elon Musk has also backed stronger safeguards.3
Any workable regulatory framework must account for competition from China. By August 2026, seven of the ten most-used models on OpenRouter by token volume were Chinese-built open-weight models, underscoring how quickly Chinese labs have gained adoption while narrowing the performance gap.4 The Trump administration has meanwhile made faster data center permitting and AI infrastructure central to its competitiveness agenda.5 That position may be at odds with voter sentiment, as recent polling points to broad skepticism toward new data centers.6 Even under divided government, however, federal permitting, land use and agency priorities give the executive branch considerable ability to advance this agenda without new legislation.
Regulation also does not change the physical bottlenecks. Chips receive much of the attention, but power could be an equally important constraint—and a major investment catalyst. In August, we published insights on AI’s rising electricity needs. As AI shifts toward more complex workloads, rising electricity demand should reinforce the need for additional generation, grid capacity, and data center infrastructure.
It's Not Just the Candidates Who Are Power-Hungry
GPU electricity consumption across AI model types
Source: International Energy Agency, Apr 2026. Log scale.
Tariffs are increasingly an executive-policy story. The Supreme Court limited the administration’s use of emergency powers, but longstanding tariff authorities remain available, and expanding domestic production retains support across party lines. The mechanism may change after the midterms, but the strategic direction is more durable. CHIPS Act incentives, infrastructure spending, supply chain security and tax provisions are products of multiple administrations and Congresses.
The economic data are beginning to confirm that direction, as we covered last month. The ISM Manufacturing PMI reached 55.6 in July, its highest level since May 2022 and its seventh consecutive month in expansion. Fifteen of eighteen industries grew, while the employment index returned to expansion for the first time in 33 months. These are early signals, but they suggest reshoring is moving from policy intent toward real activity.8
Made in America remains one of the few durable bipartisan policy priorities.
A divided Congress would raise the hurdle for healthcare legislation, although executive action, agency policy, and drug price negotiations would continue. The Trump administration has pursued direct agreements with pharmaceutical manufacturers and price-focused executive action, making targeted pressure more likely than sweeping legislation.9
For the first time in several cycles, healthcare also appears to be taking a back seat in the campaign, making it less likely that a new Congress will feel pressure to pursue sweeping reform. In Pew’s July survey, healthcare ranked behind the economy, affordability, government ethics, and immigration among voters’ top concerns.
Healthcare Trails Economic Concerns on the Midterm Agenda
Percent naming issue as most important
Source: Pew Research Center, Jul 2026
That relative quiet arrives as the sector’s public narrative improves. GLP-1s are transforming obesity and cardiometabolic care. In oncology, Merck and Moderna reported encouraging late-stage results for a personalized mRNA cancer vaccine in melanoma, while a newly approved pancreatic-cancer therapy nearly doubled median survival versus chemotherapy. Both advances require appropriate caution, but they offer tangible reasons for optimism.10
Politics can create volatility, but investors often overstate its impact on long-term fundamentals. AI infrastructure and U.S. manufacturing are being advanced by capital spending, rising demand, and policies that have survived multiple administrations.
Healthcare may offer a different type of opportunity. Innovation is accelerating across obesity, oncology, and AI-enabled drug discovery, while earnings expectations are strengthening and investor ownership remains near historic lows. With healthcare near a multidecade-low S&P 500 weight, this disconnect suggests the sector may be worth revisiting as 2026 draws to a close.
For long-term investors, election-driven volatility may be an opportunity to put money to work rather than a reason to wait for a political all-clear.