Citi sees midterm elections as non-event for S&P 500 fundamentals

Investing.com -- Citi analysts said they view the upcoming midterm elections as largely a non-event for S&P 500 fundamentals across likely outcomes, with sector-level impacts more probable than broad market effects.

Prediction markets and polls point to a House flip toward Democrats, with the Senate remaining a toss-up. The bank said market response should be minimal as this outcome may already be priced in. The firm noted it would not be surprised by a Democratic sweep.

President Trump's net approval sits below his first-term pace and trails levels seen during Obama's 2014 and Bush's 2006 midterms, both of which saw chambers flip. Approvals are weakest on inflation at negative 42%, the economy at negative 27%, and foreign policy at negative 22%. Diesel prices are at all-time highs and approval on the Iran conflict stands at negative 28%.

Citi expects sector reactions to be most pronounced under a Democratic sweep scenario. Relative performance correlations to party-control odds suggest semiconductors prefer GOP control, likely tied to AI legislation risk. The bank sees slim odds of legislation derailing the AI trade given President Trump's veto and anti-regulation stance.

Consumer Discretionary has been the worst performer since end-2024, aligning with polling trends amid tariff and gasoline headwinds. Energy has led on the Iran situation, which represents a political negative.

A Democratic sweep may begin to price 2028 policy risk, mainly higher corporate taxes and AI infrastructure guardrails, according to Citi. This scenario would hand key committees to Democrats.

The bank cautioned a Democratic sweep is not entirely market-negative. Citi has argued that the S&P 500 would be higher absent tariffs and the Iran conflict. To the degree a Democratic sweep curtails or diminishes Executive tariff and war powers, the bank sees potential for a positive market response.

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