Equity

Beyond the ballot box: the real drivers of post-election market

As the United States approaches its midterm elections, investors are asking what the outcome might mean for markets. Election seasons generate floods of predictions, scenario analyses, and political commentary. Yet investors should not overestimate the importance of electoral outcomes and underestimate the influence of broader market forces.

Of course, elections are not irrelevant. Changes in government can shape fiscal policy, regulation, and investor sentiment. However, for long-term investors, the key issue is often not which party wins, but whether the election increases policy volatility, changes the broader economic backdrop, influences interest rates, or alters corporate earnings prospects.

In our view, the coming midterms are unlikely to become a decisive turning point for markets. Instead, they may drive shifts in performance across sectors and styles, while the fundamental drivers of return will remain interest rates, earnings growth, and the continuing evolution of the AI investment cycle.

Policy clarity is more important than electoral outcomes

Political headlines can move markets in the short term, but uncertainty is often more important than any specific electoral outcome, explaining why we may see a rotation into defensive positions as more clarity on policy direction is awaited.

Indeed, markets frequently become more constructive after elections, as the reduction in uncertainty can lower the equity risk premium demanded by investors and support a recovery in appetite for riskier assets.

Current polls and prediction markets suggest a realistic possibility of divided government in Washington, with control potentially split between the Democrats and Republicans. From a market perspective, divided government has often been viewed favourably as the likelihood of major legislative changes tends to fall and policy volatility is reduced. Fewer significant policy shifts can mean greater predictability and a more stable backdrop for businesses and investors.

While this does not imply stronger economic growth or better earnings per se, markets are certainly more comfortable operating in an environment where the rules of the game appear stable. And even if the Democrats were to sweep Congress, the outcome may still be constructive for markets, depending on the degree of policy clarity going forward.

Exhibit 1
Chart comparing historical S&P 500 returns around US midterm elections from 1929 to 2024. Average returns were 2.9% in the 12 months before midterms, 8.9% across all years and 12.4% in the 12 months after midterms, showing historically stronger average performance following midterm elections.

Source: LSEG/Allianz Global Investors, October 2026.

Rates still matter more than politics

While political developments attract attention, investors should not lose sight of a variable that has consistently exercised a great influence over equity prices in recent years: interest rates. The ultimate market impact of any election outcome is likely to depend on whether it changes expectations for inflation, and fiscal and monetary policies. Any shift that increases inflationary pressures could reinforce expectations for higher interest rates. Conversely, a more moderate fiscal backdrop could ease inflation concerns and support lower yields.

These dynamics matter because they influence the relative attractiveness of different parts of the equity market. Higher inflation and interest rates have historically tended to favour shorter-duration equities, including many value-oriented and income-generating businesses. Such companies derive a greater share of their valuations from near-term cash flows and are therefore less sensitive to higher discount rates. Lower inflation and lower rates, in contrast, have typically been more supportive of longer-duration growth companies whose expected earnings are weighted further into the future.

What thus matters most is the extent to which the outcome of the election affects the path of inflation and interest rates. Politics may be the trigger, but rates remain the transmission mechanism through which many market effects are ultimately felt.

Exhibit 2
The chart shows how investment styles respond to moves in the US 10-year Treasury yield. Value has the strongest positive exposure, at roughly +8%, so it tends to benefit when yields rise. Growth and Quality are negative, at around -2%, and tend to lag in that environment. The relationship is symmetric, so falling yields would work against Value while relatively helping Growth and Quality. We also see that oil is a secondary driver: all three styles show a small negative exposure, so a rising oil price would be a mild headwind across the board.
The chart shows how investment styles respond to moves in the US 10-year Treasury yield.

Source: Allianz Global Investors, October 2026.

The AI factor

However, one reason we should be cautious about relying too heavily on historical election playbooks is the extraordinary importance of AI in this political cycle. Capital expenditure decisions, earnings expectations, and market performance across a wide range of sectors continue to rely on the AI growth narrative.

As a result, traditional relationships between politics, rates, and style performance may prove less reliable than in the past. For example, long-duration growth companies are often expected to struggle when interest rates remain elevated. However, businesses with direct exposure to AI infrastructure, semiconductor demand, or software innovation have continued to attract strong investor interest because the scale of the opportunity is perceived to be exceptional.

At the same time, the AI story itself is not immune from political developments. Regulatory scrutiny and policy oversight could become more prominent following the election, particularly if Democratic policymakers seek to establish clearer frameworks around AI deployment and governance. Greater uncertainty surrounding regulation, capital expenditure plans, or future returns on investment could challenge market assumptions, including the current aggressive pricing of some AI stocks.

Don’t forget earnings season

While politics dominates media coverage, investors should remember that companies ultimately create value through earnings, not election results. Indeed, the upcoming earnings season may prove more important than the election. Strong corporate results could help underpin market resilience regardless of the political outcome. Conversely, disappointing earnings could increase market sensitivity to political developments and amplify volatility.

This is particularly relevant given the high expectations embedded in parts of the market. Investors will be looking not only at earnings growth but also at management commentary on demand trends, capital expenditure plans, and the outlook for AI-related investments. History suggests that political events often create noise while earnings provide the foundation for long-term returns. That lesson may prove instructive in the months ahead.

A catalyst for rotation, not a market turning point

The temptation during election years is to focus on winners and losers. Yet investors may be better served by asking a different question: will there be substantive policy changes, and what will they mean for the market environment? Our view is that the overall impact on markets may be less dramatic than many expect. Rather than triggering a major shift in the market’s direction, the election is more likely to influence where market gains are concentrated.

Investors may rotate between defensive and cyclical exposures, between value and growth styles, and between regions as they reassess the outlook for inflation, interest rates and policy stability. Indeed, Europe and Asia may be beneficiaries; the former if investors seek greater diversification away from US equities or rotate towards regions with less direct exposure to election-related headlines, while several Asian economies have historically responded positively when investors perceive lower policy volatility in Washington.

Ultimately, the most important determinants of market performance are likely to remain the same: the path of interest rates, the strength of corporate earnings, and the continued development of the AI investment cycle. Politics will undoubtedly dominate the headlines. But when the dust settles, investors may once again discover that policy volatility matters more than politics, and that fundamentals matter more than either.

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested.

Past performance does not predict future returns. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency.

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