Midterm elections are the elephant in the room. But not in financial markets.

Instead, what’s driving the markets are interest rates, inflation, artificial intelligence, tariffs, the Iran conflict and the price of oil.

The midterms? On a personal level, I’m transfixed by the political news. But as a close observer of the markets, I’ve concluded that, for the short term, at least, the elections scarcely matter.

For one thing, financial markets are forward-looking. Prices already have certain political expectations baked into them, foremost among them the historical fact that the political party that controls the White House has typically lost ground in the midterms. That’s exactly what the polls and prediction markets anticipate for Tuesday’s elections, and it’s what the markets have been assuming for months.

Even if this broad assumption turns out to be correct, of course, plenty of urgent political questions still need to be answered. Will the Democrats control both houses of Congress, just one or none? Will this election represent a turning point for U.S. democracy? These are serious issues, no doubt.

For the markets, however, the consensus projections are simple: Democrats will control at least one chamber of Congress, the House. With a Republican in the White House, that’s a recipe for political gridlock — in which neither party can enact major legislation. It’s not a good situation if you want to get things done. But Wall Street loves gridlock because it abhors political interference — or so some analysts say every election cycle.

As I pointed out back in 2010, however, the evidence for markets’ supposed preference for gridlock, or for any other political alignment, is flimsy when you look at actual financial returns. That’s still the case.

Since 1930, in the year after a president’s political party lost control of the House in the midterms, the S&P 500 or its predecessors rose an average 8.8%. But the S&P 500 rose an average 14% in the year after all midterm elections. This data comes from a recent study by Ed Clissold, chief U.S. strategist, and Thanh Nguyen, senior analyst, for Ned Davis Research, an independent financial research company.

The broader truth seems to be that, with occasional exceptions, overall stock market returns generally don’t depend on politics, one way or another.

Dysfunctional Investing

Explicitly political investment strategies haven’t kept up with the overall market this year, as I noted in July. Consider these updated returns, including reinvested dividends, for this year through Friday, according to FactSet.

— Truth Social America First ETF (with the ticker MAGA), which calls itself a vehicle for investing “in companies that align with your Republican political beliefs.” It is up 11.2%.

— Democratic Large Core ETF (ticker DEMZ), which contains S&P 500 companies “that have made over 75% of their political contributions to Democratic causes and candidates.” It has gained 11%.

The benchmark S&P 500, by contrast, is up 13.8%, with dividends.

Just holding the broad market was a better strategy. The so-called Democratic fund’s performance was closest to the S&P 500’s, though it lagged the benchmark, perhaps because it excluded the stock with the best returns in the S&P 500 this year: Moderna, the biotechnology company, which was up more than 600%, according to FactSet.

The MAGA fund excluded so many tech companies, including Moderna, Advanced Micro Devices, Nvidia, Alphabet and Apple, that it amounted to a tilt against tech. That was a bad move in the current stock market.

The Tech Factor

While politics haven’t mattered much for stocks, tech — and specifically AI — definitely has.

That was clear this past week. Documents filed on Monday by Anthropic, the giant AI startup that plans to go public before the end of the year, bolstered the stock market. And the company’s prospectus suggests that its significance goes way beyond that.

“We believe that AI is one of the most consequential technologies in human history,” the document said. It warned that “consequential” could mean horrific.

“Sufficiently advanced AI systems,” the prospectus continued, “could, if not developed, deployed and operated with appropriate safeguards, oversight and security measures, pose catastrophic or existential risks to humanity.”

Yet the company also said it was generating revenue on an astounding scale. For the first half of the year, its sales were $16.3 billion, up nearly 14-fold from the same period a year ago. Its losses for the same period were $80.7 billion, however — a reminder that it is an open question whether eventual profits from AI will ever justify the mammoth sums required to build AI infrastructure.

Stock market volatility began rising in recent weeks on concerns about AI spending by giants like Alphabet, Meta and Amazon, and by financially pressured companies like CoreWeave and Oracle, whose data center bonds have sunk in value.

The stock market, though, is still being supported by soaring corporate earnings, thanks in no small part to profits from chipmakers including Nvidia and Advanced Micro Devices. This AI boom has created an extraordinarily concentrated stock market, adding risk to investor portfolios. Should AI stocks or bonds weaken further, important parts of the stock and bond markets could be in jeopardy.

War, Rates and Inflation

The bond market has already been through plenty of turmoil, with benchmark 10-year Treasury rates soaring above 5.3% in September, up from 4.2% at the beginning of this year.

French sovereign bonds weakened during the national demonstrations over the high cost of living and deteriorating school conditions, and bonds of other European nations, with swelling amounts of debt, have been hit hard.

Those seeking safety — whether from troubled European bonds, AI bonds or the shaky stock market — moved back into Treasury bonds in October. That increased demand appears to have raised bond prices and lowered yields, which move in opposite directions.

At the same time, short-term interest rates have been rising, along with the rate of inflation.

The Federal Reserve on Wednesday held steady on its policy rate, the short-term Federal funds rate, at a range of 3.75 to 4%. But the Fed raised rates in September for the first time in three years, and with the inflation rate still well above the Fed’s 2% annual target, the markets expect the central bank to raise rates three more times from December through June. The central bank may have delayed raising rates before the midterm elections at least partly to avoid a heightened conflict with President Donald Trump, who has demanded lower rates for months.

Higher interest rates in the bond and money markets mean that loans of virtually all kinds, from credit cards and automobiles to business loans and mortgages, cost more. That’s causing hardship for millions of people and slowing economic growth.

Furthermore, if rates keep rising, bond prices will fall further, and stocks are likely to be damaged, for two reasons: Corporate profits will be harder to maintain if financing costs are higher, and stocks will be unattractive compared with bonds offering higher interest rates. Investors will need to keep track of interest rates to protect themselves in the stock and bond markets.

On the other hand, as I pointed out last week, money market funds, Treasury bills, high-yield savings accounts and certificates of deposit are paying ever-higher interest rates just for parking your money. The average rate in the 100 largest money market funds tracked by Crane Data rose to 3.75% on Friday, from 3.71% the previous week, and is likely to surpass 4% in December if the Fed raises rates as expected.

Why have interest rates risen this year? There are many reasons, but one is glaring, and it is a matter of geopolitics: the war with Iran. Rates began to soar, along with oil prices and inflation, after the United States and Israel attacked Iran on Feb. 28. As one consequence, energy stocks have spiked more than 50% this year, the most of any sector in the S&P 500.

Whether the conflict in the Middle East escalates after the midterms is another critical question for the markets. That will depend on decisions by Trump and leaders in the Middle East, though a reconfigured Congress could conceivably begin to play a larger role in foreign policy.

But betting on politics, or geopolitics, strikes me as an unwise financial strategy. Such investing hasn’t worked reliably over the last century.

Instead, for people with long horizons, sticking with broad investments in the markets has been a winning approach. I expect that will continue to be the case, whatever the outcome of the midterm elections.

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This article originally appeared in The New York Times.

By: Jeff Sommer/Ben Voldman

c.2026 The New York Times Company