The 2026 midterm elections are unlikely to cause significant policy shifts due to probable gridlock. Their real value for investors is in providing 'soft signals' about evolving voter preferences that could foreshadow major policy directions after the 2028 general election, creating opportunities if the market misinterprets them.

Traders have learned that Trump's seemingly erratic policy moves follow a pattern: he will not let the stock market fall too far before intervening. This creates a predictable band of volatility, where he creates crises and then resolves them to boost the market.

The US government's focus on economic indicators has made the S&P and NASDAQ the primary arbiters of an administration's success. As long as the market is performing well, a president feels empowered to pursue controversial policies without significant pushback, as economic prosperity mutes corporate and public outrage.

Investors should not over-react to congressional turbulence. Many of the most market-relevant policies—on trade, regulation, industrial strategy, and AI—are executed via executive authority, not congressional action. This means their trajectory is unlikely to be altered by events like a shutdown or shifting political dynamics in Congress.

With major US policy variables like tariffs and fiscal stimulus now more defined, investors should shift focus from predicting policy direction to analyzing how businesses and consumers react to these established policies, as this will drive market outcomes.

The Trump-era tariffs are not a temporary political maneuver but a lasting shift in U.S. economic policy. This reflects a broader, bipartisan move towards "spherification," prioritizing supply chain resilience and national security. A future Democratic administration is expected to maintain them.

The traditional relationship where economic performance dictated political outcomes has flipped. Now, political priorities like tariff policies, reshoring, and populist movements are the primary drivers of economic trends, creating a more unpredictable environment for investors.

Even if Democrats win the House, their majority would likely be too slim to significantly change policies that impact market pricing. Similarly, a plausible Republican agenda like more tax cuts would face internal party opposition from fiscal hawks, suggesting a continuation of policy gridlock regardless of the outcome.

Despite expected legislative gridlock, investors should focus on the executive branch. The president's most impactful market tools, such as tariff policy and deregulation via executive agencies, do not require congressional approval. Significant policy shifts can therefore occur even when Congress is divided and inactive.