Midterms: How will they affect stocks?

A divided Congress is expected after the midterms, and when it comes to equities, there will be winners and losers from this outcome.

Goldman Sachs’ political economists believe Democrats will gain control of the House and the Republicans will retain a slim Senate majority after midterms. A divided Congress would mean increased equity volatility and an uncertain future for infrastructure spending while pharmaceutical stocks could benefit, the bank’s analysts explained in a research note.

Legislators from both sides of the aisle have expressed an interest in infrastructure spending, and while analysts have voiced optimism over an infrastructure bill being passed next year, Goldman’s economists disagree. They assign a mere 25 percent likelihood that infrastructure spending legislation will be enacted if Republicans maintain control of Congress. If Democrats take control of one or both chambers, then an infrastructure bill is even less likely.

A bright spot in the markets following a split Congress could be pharmaceutical stocks, which would benefit from the reduced likelihood of new drug price regulations.

Goldman’s economists expect Congress will extend current spending authority to Sept. 30, 2019, this December, with the debt limit likely reached in August. But, if Democrats gain control of one or both Houses then a fiscal compromise will be challenging, and that could be risky for financial markets.