Dear Friends,

We hope your week was a good one.

The November 3^rd U.S. midterm elections will help shape the policy backdrop for the next two years. Below, we discuss the potential market implications, alongside the corporate earnings trend and monetary policy developments that we expect to remain central to the investment outlook.

Midterms Around the Corner

In a little over a week, Americans will vote to determine control of Congress for the remainder of this presidential term. Current polling numbers point to a Democratic win in the House of Representatives, though the Senate outcome appears more uncertain.  

Control of Congress matters for fiscal policy. A Democratic House would likely make further tax cuts or major spending initiatives more difficult to advance, as tax and spending legislation requires approval from both chambers. Meanwhile, a Democratic majority in the Senate would give the party greater influence over presidential appointments, including those to the Supreme Court and Federal Reserve. Even with a Democratic sweep, however, an override of a presidential veto would remain unlikely, requiring two-thirds support in both chambers. President Trump would also retain considerable executive authority over foreign policy, trade, and immigration—areas that he would be inclined to focus on for the rest of his term. For Canada, a change in congressional control offers little clarity on the future direction of U.S. tariffs.

Historically, midterm elections have often been accompanied by stock market weakness in the weeks leading up to the vote, followed by stronger returns as election-related uncertainty subsides. RBC Wealth Management’s analysis shows that, since 1932, the S&P 500 has averaged a subdued 3.3% price gain during midterm years, followed by an average return of 14.0% in the subsequent calendar year. U.S. equities have already gained roughly 12.0% this year, supported by economic resilience, strong AI-related investment, and above-average corporate earnings growth. We do not expect the election outcome to fundamentally change these underlying forces. Instead, we see the ongoing third-quarter earnings season and evolving expectations for Federal Reserve interest rate policy as more consequential for the market’s direction.

Earnings Remain in Focus

Third-quarter earnings season is underway, with about 20% of S&P 500 companies having reported to date. Of those that have provided financial updates, 80% have exceeded earnings estimates, modestly ahead of the five-year average of 78%. While we are still early in the reporting season, they point to a broadly constructive trend for earnings.

Large U.S. banks set the tone with generally positive reads on consumer spending and business activity. Attention is now turning to Big Tech, whose significant weight in the U.S. equity market and outsized contribution to expected earnings growth make its results particularly important in shaping sentiment. Investors will likely scrutinize for tangible evidence that AI investments are translating into meaningful revenues and returns, that the largest tech companies can sustain their spending, and that AI-related demand remains strong enough to validate elevated profitability expectations.

Takeaway

Markets have delivered strong returns for investors this year despite a war-driven oil shock, rising interest rates, bouts of AI unease, and renewed trade tensions. These challenges remain relevant risks that we are monitoring closely, but the market’s performance also underscores the resilience of the economy and corporate earnings in recent years.

While AI-related business investment continues to provide an important source of growth, the associated spending may also contribute to inflationary and interest rate pressures, alongside the lingering effects of the U.S.-Iran war.

For investors, the key question is how these competing forces evolve. As we look beyond the midterm elections, we remain focused on the balance between resilient earnings growth and the potential for persistent inflation and higher borrowing costs.

Should you have any questions, please feel free to reach out.

Have a great weekend.

Best regards,

Your Mete Wealth Management Team