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November 5,  2026

The Midterm Shock: Why Stocks Rallied and What Comes Next

For Republicans, there is no way to sugarcoat it. The GOP suffered a sweeping defeat in Tuesday's midterm elections, losing control of both chambers of Congress.

Going into Election Day, polls and prediction markets had signaled major risks. The House of Representatives was widely considered a lost cause, although Republicans still had a plausible path to retaining the Senate.

But the losses were even worse than expected.

Republicans surrendered Senate seats in several states that were previously considered reliably red, including Iowa, Kansas, and even South Carolina. One of the most surprising—and potentially consequential—defeats was the failure of Republican Governor Greg Abbott to win reelection in Texas.

Yet despite the magnitude of the Republican losses, markets responded positively.

After an initial sell-off in overnight futures trading, stocks rallied Wednesday. By the end of the day, the S&P 500 had gained approximately 1.6%, while the NASDAQ Composite was up 1.4%.

Meanwhile, 10-year Treasury yields declined, the dollar weakened against other major currencies, crude oil prices plunged nearly 9%, and gold rallied approximately 3.5%.

These moves are especially interesting given the economic policies advocated by some of the victorious Democratic candidates, which ranged from wealth taxes to moratoriums on AI infrastructure and nationalized health care.

Why would such a decisive political victory for the left be so well received by financial markets?

In our October 22 76report, Midterms and the Stock Market—How Worried Should We Be?, we anticipated Democratic gains, particularly in the House. We also acknowledged the strong possibility that Republicans could lose the Senate.

But we emphasized that investors should not place too much weight on the election itself.

For one thing, we noted that stocks have historically responded positively to the resolution of political uncertainty, regardless of which party benefits.

More fundamentally, we identified two economic forces that would remain especially critical for the stock market, regardless of who controlled Congress—the continued advance of the AI buildout and the trajectory of oil prices.

The events of this week reinforce these views, while also introducing some important new considerations.

Below, we examine why markets have responded positively, what the Republican defeat reveals about the changing political landscape, and what it all means for interest rates, AI, oil prices, and the longer-term investment outlook.

WATCH: Trish and Rob’s Election Night coverage of the final results, market reaction, and what comes next for the economy and American politics.

Why stocks advanced

The most important explanation for the stock market's positive response is relatively straightforward. Political gridlock is often good for investors.

Democrats may now control Congress, but Republicans still control the White House.

President Trump retains his veto authority, making it extremely difficult for Democrats to implement major new legislation without Republican support. Overriding a presidential veto requires a two-thirds majority in both chambers.

This substantially limits the prospect of sweeping tax increases or other major changes to economic policy that would be harmful to either the stock market or the economy.

Furthermore, much of the administration's economic agenda is already in place.

Tax legislation passed in the current term remains on the books, while the executive branch retains considerable authority over trade, foreign policy, and regulatory matters.

Democrats will certainly exercise their new powers. We should expect investigations, hearings, contentious budget negotiations, and efforts to challenge administration policies.

But the ability to investigate, obstruct or engage in political theatre is very different from the ability to legislate.

Eliminating risks

There is also the simple matter of uncertainty.

Investors spent months anticipating a Democratic takeover without knowing how extensive Republican losses might become. With the results now largely settled, markets can begin looking beyond election probabilities.

During our election-night podcast, NASDAQ futures were down more than 2% as the scale of Democratic gains became apparent, particularly when Abbott's prospects in Texas deteriorated (more on that below).

By Wednesday morning, those losses had reversed.

This is consistent with a historical pattern we highlighted in our election preview. Stocks have generally performed well following midterm elections, regardless of the outcome.

While the fact that the election is over reduces uncertainty generally, investors took additional comfort in Trump’s apparent acceptance of the results and the integrity of the election. In many investors’ minds, that was not necessarily taken for granted given historical precedent.

The market also seemed to interpret the events of the night as reducing one risk in particular—an escalation in the war with Iran.

Oil prices have retreated meaningfully as the Trump administration has communicated the view that the election was ultimately a referendum on the war in Iran.

The market appears to believe the most likely direction of travel at this point from the Trump administration is to reach a diplomatic conclusion. The pubic has spoken, and the administration has received the message.

The decline in spot oil prices suggests this should ultimately bring about a normalization of conditions in the Strait of Hormuz and the potential for a sustained decline in oil prices going forward.

Was it really just Iran?

In a lengthy post on X on Wednesday morning, Vice President JD Vance offered a direct explanation for the Republican defeat—the war in Iran.

The reason we lost is the war. The president himself said so last night. If you'd like to argue it was worth it, that losing the Senate for the next 6 years was worth it, then do so. Argue it was a worthwhile cost to pay. Agree or disagree, that's at least honest. But everyone knows why we lost. And any honest conversation about where we go from here must start there. - JD Vance (11/4/2026)

Vance cited polling of former Trump supporters who had become disillusioned with the administration.

Their top four priorities, he said, included ending the Iran war, addressing inflation and the cost of living, putting America First, and the need to “change our relationship with Israel.”

There is no doubt that high oil prices, a consequence of disruptions in the Strait of Hormuz, were very poorly received by the voting public.

The Iran conflict has imposed enormous economic costs, particularly through higher gasoline and diesel prices. These are expenses that consumers encounter directly and frequently, making them unusually powerful political issues.

During our election night discussion, we reviewed a Raymond James analysis comparing gasoline prices with Trump's approval rating. The correlation was striking.

But there is a problem with attributing the Republican defeat entirely to Iran. Trump's approval ratings had been deteriorating long before the war began at the very end of February 2026.

Gallup recorded an approval rating of 47% shortly after his January 2025 inauguration. By November and December of that year, approval had fallen to just 36%.

The average of all approval rating polls shows a sustained and steady decline since Trump took office.

Trump Approval Rating (1/2025-11/2026)

(Source: New York Times)

The decline was not perfectly continuous, but the direction was unmistakable.

The administration was already confronting dissatisfaction over tariffs, which began in early 2025 and culminated with the Liberation Day market selloff.

Aggressive immigration enforcement and other policies and actions by Trump and members of his administration have likely alienated certain constituencies as well.

The war and subsequent surge in energy prices in early 2026 may have therefore only intensified an existing political problem.

As we do the post-mortem analysis on midterms, it is interesting to consider the specific groups in which the Republicans lost ground. Exit polling suggests severe losses among Hispanic voters as well as younger voters.

These are not necessarily the groups that are most traditionally aligned with Republican candidates. Convincing them to shift their support toward Trump was a major reason he prevailed in 2024.

But that alignment was perhaps fragile, in retrospect, as many young and Hispanic voters appear to have shifted back, along with members of other demographic cohorts.

It is not obvious to us that the war and oil prices would be the dominant factor affecting these critical swing voters.

Trump brought many new voters into the Republican tent in 2024, many of which likely switched sides because of dissatisfaction with Biden-Harris policies and the candidates personally. It appears that many of them decided to return.

The battle for 2028 begins

The Republican defeat raises an intriguing question: Who will the party nominate to succeed Trump in 2028?

JD Vance has led most early Republican primary polls, reflecting his close association with Trump and the MAGA movement.

But Tuesday's results introduce new complications for a candidate so closely identified with the administration.

Vance's unusually blunt criticism of the Iran war may offer an early indication of how he intends to distinguish himself from some of the administration's more controversial decisions.

Ron DeSantis, meanwhile, has become increasingly outspoken about the Republican Party's direction.

In a widely watched interview just before the election, the outgoing Florida governor criticized the Iran war, its impact on working-class Americans, and the party's handling of other issues, including immigration and AI data centers.

DeSantis also has a notable contrast to point to: Florida remained under Republican control even as the party suffered major defeats elsewhere.

Byron Donalds’ victory as Governor was a rare bright spot for the Republicans on Tuesday night, although the margin of victory was smaller than expected.

Secretary of State Marco Rubio is another potential contender, with substantial support in early Republican primary polling.

Rubio has earned high praise as America’s top diplomat. His Cuban heritage could be helpful with Hispanics, but he also is closely tied to the unpopular war in Iran.

Although Vance has led in national polling averages, we note with interest that DeSantis has surged today in prediction markets.

Top GOP Contenders for 2028

(Source: Kalshi)

The election and interest rates

One encouraging immediate market development has been a decline in Treasury yields.

The benchmark 10-year Treasury yield initially retreated toward 4.9%, while the US dollar weakened against other major currencies.

Part of the explanation is that divided government reduces the likelihood of additional fiscal stimulus, potentially limiting future federal borrowing requirements.

Investors may also be anticipating somewhat slower economic growth (related to political resistance to AI), which could reduce pressure on the Federal Reserve to maintain restrictive monetary policy.

Lower interest rates resulting from improving inflation and greater fiscal discipline would be broadly constructive. Lower rates resulting from deteriorating economic growth would present a more complicated picture.

Still, for income-oriented investors, the change in direction is potentially significant.

As we have discussed in recent reports, higher long-term yields have placed considerable pressure on dividend-paying stocks, REITs, Utilities, and other businesses whose valuations are sensitive to interest rates.

In October, we witnessed how relief on long-term rates could benefit income-oriented portfolios. For example, our Income Builder Model Portfolio advanced 8.3% in October, versus -0.9% for the S&P 500.

A sustained retreat in yields could provide additional support for these types of investments.

Meanwhile, a weaker dollar may benefit internationally exposed US companies and certain real assets. Both gold and Bitcoin advanced in the immediate aftermath of the election.

These developments reinforce the importance of maintaining diversification across different economic scenarios.

The threat to AI

Although the broader stock market is rallying, some AI infrastructure companies have come under considerable selling pressure.

This reflects one of the election's most important long-term implications. The political backlash against AI infrastructure is becoming increasingly powerful—and increasingly bipartisan.

Nowhere is this more apparent than Texas.

With abundant energy resources, available land, and historically business-friendly policies, Texas has emerged as one of the most important locations for the massive data center buildout.

The state accounts for a substantial share of planned US data center capacity (around 25% of the national total by some estimates).

Governor-elect Gina Hinojosa campaigned on restricting data center development, including a statewide moratorium until stronger protections are established for local communities.

But opposition to AI infrastructure was already growing among Republicans, who sensed popular pushback after initially taking a more pro-growth position.

Abbott himself had moved to restrict data center construction, ordering a halt to new state permits pending an audit of electricity and water requirements.

For investors, local political opposition to building AI infrastructure could impact the pace of development. But it does not mean the underlying demand for intelligence is disappearing.

If anything, growing demand combined with constraints on supply could make existing AI infrastructure and secured power capacity substantially more valuable.

Companies with access to electricity, strategically located facilities, and the ability to develop or operate infrastructure efficiently may gain meaningful competitive advantages.

At the same time, restrictions on new construction could delay projects, raise costs, and make it more difficult for hyperscalers to expand computing capacity.

Scarcity can enhance the value of existing assets, but an inability to expand capacity could also limit the industry's growth.

It is an important development we are focusing on across our Model Portfolios.

Ultimately, we believe the economic trajectory of AI will depend more on technological progress, the economics of deployment, and the commercial demand for intelligence than on politics, which the leading players will now have to navigate more carefully.

Looking beyond the election

The midterms have dramatically changed the political landscape, but the most important economic questions facing investors remain familiar.

Will AI continue to deliver productivity improvements and commercial opportunities that justify enormous infrastructure investment?

Will oil prices finally normalize, allowing inflation and interest rates to retreat?

And will the underlying strength of the American economy continue to translate into corporate earnings growth?

We remain constructive on the long-term potential of AI, while recognizing that the industry faces meaningful technological, financial, and increasingly political challenges.

We are also encouraged by the prospect of lower energy prices and the opportunities that may emerge as interest rates decline.

Opinions will vary on the best course of action with respect to Iran from a security perspective. But it appears that the administration, in the aftermath of this election, will be more inclined to work toward an outcome that brings oil prices down sooner rather than later.

Political fortunes can change dramatically in a single night. The economic forces that ultimately determine long-term investment returns generally move on a very different timetable.

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