In the weeks leading up to the US midterm elections, investors had formed a view that a Democratic sweep wouldn’t be good for markets.
JPMorgan ranked it as the worst outcome for the US share market. The bank’s argument was that a Democratic Congress would make it harder for Trump to pass more tax cuts and fiscal stimulus. Democrats could also push back against new AI data centres because of their impact on power prices and local communities.
A Democratic sweep was expected to lead to broad selling across AI, banking, pharmaceuticals and defence – sectors that faced the prospect of more regulation and congressional scrutiny.
When that result was confirmed, markets tanked.
Nasdaq futures fell almost 2 per cent and S&P 500 futures dropped by more than 1 per cent. Japan and South Korea, two markets with heavy exposure to AI spending, fell by more than 3 per cent as investors sold semiconductor and data centre stocks.
For a few hours, JPMorgan’s forecast looked bang on. But then something strange happened.
Japan and South Korea staged sharp intraday rebounds and US futures recovered most of their losses. By the time European markets opened, many share markets were higher.
Why markets don’t always react as expected
If you’re having déjà vu, it might be because the same thing happened when Trump unexpectedly won the 2016 presidential election.
As it became clear that he would defeat Hillary Clinton, S&P 500 futures fell almost 5 per cent. Investors thought a Trump victory would be terrible for markets because of the prospect of trade wars, immigration restrictions and political unrest.
But like this week, the panic didn’t last.
Trump gave a more measured victory speech than many expected and investors quickly switched their focus to his plans to cut company taxes, reduce regulation and spend more on defence.
By the end of the US trading day, the S&P 500 was up more than 1 per cent and shares continued rising over the following months.
An investor who correctly predicted Trump’s surprise win could still have lost money by selling shares in anticipation of a slump.
The difficulty of predicting the market reaction
History may be repeating.
The prevailing view today is that Democratic scrutiny of AI could slow data centre construction and hurt companies supplying chips, power and equipment. But I could see that narrative quickly evolving into something more market-friendly. A slower AI rollout could reduce demand for electricity and skilled workers, which in turn may ease some of the inflation created by the AI investment boom. Lower inflation and weaker employment growth could give the US Federal Reserve more room to pause interest rate rises. And the share market loves lower interest rates!
This is the problem with investing around macroeconomic events. Even if you correctly predict the outcome, markets may not react as you expect.
Gold shows why getting the event right isn’t enough
Gold is another excellent example from earlier this year.
When the war with Iran began, the prevailing view was that geopolitical uncertainty would push gold higher. Instead, gold fell by 28 per cent between the start of the war and November as investors became more focused on higher oil prices, inflation and the prospect of interest rate rises. To make things worse, some central banks mobilised their reserves to support their domestic economies as energy prices rose and oil revenues were disrupted.
Anyone who bought gold in January in anticipation of war in the Middle East may have predicted the event correctly but got the market reaction wrong.
Why staying diversified can be a better strategy
It’s one of the reasons we don’t move client portfolios in and out of markets around elections or other major geopolitical events. To make money, you first need to predict the event. Then you need to correctly guess how other investors will react and what’s already baked into prices. You also need to know when to exit and when to enter again. Meanwhile, each switch adds brokerage, spreads and potential tax. The chance of getting every decision right is slim.
For most investors, the better approach is to stay diversified and invested rather than change their portfolio every time the market finds a new story to follow.
For all the doomsday predictions about a Democratic win, the Dow Jones finished 3 per cent higher – its best day since Trump paused reciprocal tariffs in April last year. The S&P 500 gained 1.6 per cent and the Nasdaq climbed 1.4 per cent.
My advice, stay invested. Think long term.
This article was originally published as an opinion piece for The Australian – Investors caught out as Wall Street defies Democratic sweep doom (05 November 2026).
