If the markets could vote in the midterms...

On screen disclaimer:
Please read important information at the end of this program. Recorded on 10/15/2026.

On screen copy:
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank

Chris Hyzy
Decisions in Washington can shape the investment landscape long after an election is over. In this midterm cycle, the question for investors is not simply who controls Congress, but how the outcome could reshape the policy outlook, tax priorities and market leadership, and where uncertainty may surface risks or possible opportunities. Which potential scenarios could matter most for portfolios, and what should investors watch as Washington's balance of power takes shape?

Joining me now is Annie Palisi, Senior Vice President for Federal Government Relations at Bank of America and Dan Clifton, head of Policy Research with Baird Strategas.

Annie. Dan. Thanks for joining me today. In just a short time, we have the midterm elections, the environment the market is trying to digest what may happen. But what is different this time as it relates to heading into this midterm election versus the most recent ones?

Annie Palisi
I think the most obvious one is the fact that there's not been an October surprise yet.

On screen copy:
Annie Palisi
Senior Vice President, Federal Government Relations
Bank of America

In 2022, we had a red sweep predicted, and then we had the Dobbs decision that really energized Democratic voters to come out. And even though the House did flip, it was only by a smaller margin. No red wave emerged. In 2018, we had Kavanaugh was sort of the galvanizing event that really motivated Republican voters to come out. And so even though Democrats were able to flip the House, Republicans were able to gain two in the Senate. And so right now, we haven't really seen that big event happen in October. And so the environment has really favored Democrats. And it's really a question as to whether or not and how quickly the bottom falls out.

Chris Hyzy
Dan I know you've been out there with a lot of clients. You've been on the road constantly. What are you hearing about this?

On screen copy:
Dan Clifton
Head of Policy Research
Baird Strategas

Dan Clifton
I would agree with Annie. Like, you know, when you look at kind of this election itself, unpopular president with high gasoline prices, an unpopular war, what's really similar is for the Democrats to win the Senate like 2006, is to win in very Republican states. Very difficult for those Democrats to win in Texas, in Ohio to win. It's only been done once or twice to win states like that. If they do, it's going to be very close within 1%. So I'm expecting a very exciting election night and, even a very exciting post-election, possibly recounts and other types of events that can go with that.

And just to your point about, you know, what's different, what's the same, at this point four years ago, the market was pricing in an 80% chance of Republicans sweep. It didn't materialize.

Chris Hyzy
What does the market expect right now?

Dan Clifton
And the market is pricing in about a 65% chance of a Democratic sweep. And so we don't look at that by the S&P 500. Midterm elections are never really macro elections. They're about sectors and specific stocks. So you can see it in financials. You can see it in biotech. You can see it in industrials related to data centers. And as the Democrats odds going up. These stocks have underperformed the S&P 500 almost proportionately. Then on the other side you see it in some of the healthcare stocks that would benefit from what the Democrats want to do on healthcare. And what makes that interesting is if the Republicans are going to win the Senate, there is tremendous upside in the sectors that I just talked about.

Chris Hyzy
Let's talk about policy. If there is what the market expects in terms of a complete sweep, and you get a divided government from the executive branch to Congress, what policy changes could we see?

Annie Palisi
Big policy. Just as a reminder, just because Democrats leave doesn't mean that they get to they may be able to set the agenda, but that doesn't mean that those things become law. And I think some of the things that we're looking at are what are the more populist things that both align with what Trump wants and maybe what the Democrats want. In terms of tax, I mean, you're not going to get these big tax bills. You don't have reconciliation. President is still able to veto things. And I think in a presidential cycle, campaign cycle, you're not going to have a lot of Democrats wanting to give the president big wins. But I do think I mean one that comes to mind is, you know, capping credit cards.

On screen copy:
President Trump and Congressional Democrats have voiced support for a 10% cap on credit card interest rates.

That's something that both the president and a lot of Democrats have both spoken about last cycle. That could be one of those issues, I like to call like a U-shape issue. And so looking at sort of where that populist agenda is really could be the places where you could get some movement.

Chris Hyzy
And that's in terms of the interest rate.

Annie Palisi
Right, exactly. But I think, you know, in terms of another big tax bill, you know, you're not really going to see that in a sweep.

Dan Clifton
Let me, I would agree with all that. The budget will be very important. So if the Democrats sweep, they'll be able to use that budget to be able to get policy changes through. And the reason is that we haven't passed any defense money despite the war in Iran. So they'll go to the president if the Democrats choose accomplishment over ambition. But I think what they'll do is they'll set up a debate and say, we'll give you your defense money, but we want more National Institute of Health money. We want the Medicaid cuts to be restored. The president was never really a big supporter of those Medicaid cuts. They may want something on wind and solar. And you use the budget. I think the larger issue and the more leverage the Democrats will have is that they have the debt ceiling. And so if they have the debt ceiling at the end of '27, more and more Democrats are talking about using the debt ceiling very similar to the way it was used in 2011 to get spending cuts.

On screen copy:
The debt ceiling limit is expected to be reached late in 2027.

Dan Clifton
And if they think they got a big enough election win, they'll say, oh, we have a mandate and our mandates on data center. So we want to take away your expensing provision and not sure if they're going to be successful, but we're preparing our clients for the possibility of that. And to Annie's point, credit cards, maybe even interchange fees if you don't do the credit card cap is something that the president's endorsed, the Democrats would like to do.

On healthcare, you're going to hear a lot more about drug pricing negotiations as a way of paying for some of its Medicaid spending. The president's been pushing this idea of a global price on Medicaid for drug prices. So, you know, that would change which companies would be impacted by that. And maybe that's part of the budget negotiations. So you know there's opportunities. Not all of them are guaranteed.

Annie Palisi
The other thing to keep in mind, though, is that if Democrats get the Senate, they could do away with the filibuster. And so then you have a situation where whether it's on certain issues where they see a path to being, the president being able to sign something into law, they could change it to a 50-vote threshold versus the 60-vote threshold.

I think that's where things can really start to get really interesting if that becomes live. But it's just the must-pass bills where you have those big negotiations. So government funding and debt ceiling next year where things move. It's not necessarily where it organically comes up, you know, a bill you know, bill becomes a law, but in the way that it originates from the committee just based on the environment. Because it will be, there will be a lot of investigations. You know, you're going to be looking at Democrats putting forth, you know, H.R. 1 will probably be healthcare followed very closely by a corruption package.

Chris Hyzy
Does this change at all in terms of this dynamic, in terms of the U, in terms of the negotiations, if the Republicans hold the Senate, in your opinion?

Annie Palisi
Well, I mean, if Republicans hold the Senate, then they're able to still do nominations. They're still able to kind of tamp down investigations, because it will just be in the House. They can still support the president's agenda, particularly when it comes to defense funding and appropriations bills and things like that. You still have the movement. And so, yeah, there it does become different.

Dan Clifton
I would just add to that, that I would think about a divided government with the Democrat, Republican Senate is more defense funding and maybe some NIH, but less of all that other healthcare stuff that we talked about. Right, so it moderates it down. The real leverage for the Democrats come from having both chambers. That's where they have control of those must-pass legislative items.

Chris Hyzy
Let's talk about the market now for a second. Historically, we've gone through these numbers in the past fourth quarter, the best quarter. As it relates to the S&P 500. Also during the midterm election years, you typically have a sizable drawdown. Yeah, that's the 19% or something on average when you go back in history. We haven't had that. However, underneath the index you know something very important has been going on which is showcasing some of that. What do you think is different?

Dan Clifton
So we didn't have that 19% sell off before the election because earnings are up 30% and we did a trillion dollars of stimulus this year. So that stimulus served as a shock absorber from the Iran war. Like something always happens in a midterm election year.

What I would argue is it looks a lot like 2018, Trump's first midterm. We did not have that sell off despite the trade war. But we got it after the election, and we got it in the final six weeks. And the reason why we got that was because we had a new Fed Chair who was battling with the market, just like we do today.

Trump was fighting with Xi over tariffs. Today it's data centers and how many data centers we're going to build. And number three, the Democrats won the House. And they said, we're going to shut the government down when the C.R. expires. So that doesn't mean that there's going to be a sell off this time around.

On screen copy:
State election outcomes could affect data center approvals, construction and related capital spending.

Dan Clifton
But if you get an election result where 5 or 6 governors races flip from Republican to Democrat in the data center states, like Ohio, Iowa, Georgia, Texas, the market will then start to reprice how many data centers are going to get built. And because it's such a big part of the market cap of the S&P, and because it's such a big part of GDP, you could start to get some, some downward effect on it.

Chris Hyzy
And speaking of artificial intelligence, AI, SI, super intelligence, data center build outs. Where are we in all this from a political perspective, from the midterm elections perspective? When we come out the other side, what do you think the environment looks like?

On screen copy:
65% of registered voters oppose building data centers in their communities.
Source: NPR/PBS/Marist poll, September 14-15, 2026

Annie Palisi
Well, I mean, I think voters have sort of spoken. They don't like the data centers. But I think if you pull up, it's really a technology problem. How is AI operating in your kid's school? How is AI operating in your job, and the fear that comes along with that? And so I think Congress is grappling with how to do that and having a really hard time. I think you're going to see a lot of bipartisanship in terms of agreement that this needs to be addressed and not a lot of legislation in terms of law there. You know, in terms of federal AI framework, things of that nature, I don't really see that happening unless there's some big event that warrants that. But there's a lot of conversation about how to address it and what's the right thing to do. That's definitely hit a fever pitch on the Hill. And mostly because of the campaign trail, and voter backlash against data centers and technology. But I have a hard time seeing something big happen.

Dan Clifton
Yeah, I think the data center issue, which is different than the AI issue, is a state-based issue, and the governors races matter. In Virginia, they elected a new governor last November. She campaigned on electricity prices. They put a $600 million tax on the data centers, and within three days they canceled their largest data center project. So there's no campaign advisor who's going to say to their, to their new elected official like, oh, yeah, we want a data center that's forget about it.

So I do think that the market is a little bit complacent about what's going to happen here. And they say, oh, well, they're never going to give up the jobs. I think there's going to be a lot more tax increases at the state level, a lot more regulation. And that will reduce the number of speculative data centers. So there will be some talk about it. Yeah. I totally agree that just almost impossible to legislate on this at the federal level, given the wide variance of views.

Annie Palisi
I would say the only thing that you addressed is the affordability comment, and that I think we may see them legislate on, like a rate payer protection or how to protect in terms of how of your electricity bill is affected, your water resources and things like that. You may see them come together on something like that because affordability will be, I like to say that it's buzzword this cycle, it will definitely be the buzz word next year.

Chris Hyzy
Let's end on sectors. Any particular sectors that given what markets think, potential changes, we talked about no real big change to policy, kind of written in stone already. What sectors could benefit coming out of the midterm elections in your opinion?

On screen copy:
Annie's sectors to watch post-election:

• Healthcare
• Defense

Annie Palisi
We mentioned healthcare I think healthcare is both a headwind and a benefit. I think that, you know, if there's a sweep Democrats can protect cuts from healthcare. But also they're going to be going after people who are talking about costs, right? So, I think the insurance companies and healthcare community are definitely in the crosshairs there.

But I think in terms of a place to watch, I mean, you're going to look at defense. Defense. This could be a boom or could be a bust. I think defense spending with a sweep, you're looking at some cuts, a little bit more restrictions, maybe in you know money going into Iran. But when you look at Ukraine, it could be the flip, I think in a sweep or even in a Dem majority just in the House, you're going to have more people who are willing to give, you know, to a Ukraine conflict then maybe as the status quo.

Dan Clifton
Absolutely. And, again, I think healthcare is bifurcating. So it's sub-industry winners and losers. Life science tools are probably the best sub industry for the election because they feed directly through the National Institute of Health budget, which is a Democratic priority.

On screen copy:
Dan's sectors to watch post-election:

• Healthcare
• Industrials
• Financials

Dan Clifton
The services, the Medicaid, HMOs, hospitals, they'll benefit. But the insurers, the large insurers get hit with Medicare Advantage cuts. Right. And then how do you do the pharma cuts? So it's a very interesting, you can't just say one sector for them. I think industrials have a lot at play here. They have benefits the expensing the build out in the AI data centers.

And you have defense that's built into that. And then obviously financials if I see that the Republicans are going to take over the Senate, the likelihood of credit cards or interchange are off the table. Right? I don't know if you agree with me on that, but from my vantage point, I look at that and I'm like, man, it's things are priced in some pretty bad news right now. And it would be pretty big upside for there.

Chris Hyzy
So as always, interesting times. Thanks for joining me today, Annie, Dan.

If you want to discuss how the results of the midterms may have an impact on your portfolio, speak with an advisor if you work with one. We'll see you next time.