Franklin Templeton and Russell Investments say the Democratic sweep reinforces diversification over dramatic portfolio shifts
Despite the scale of the Democratic midterm sweep catching markets off guard, two investment experts suggest the result of the elections shouldn’t prompt institutional investors to rethink their US equity positions or currency allocations.
Michael Greenberg, senior vice-president, portfolio manager, and head of Americas portfolio management at Franklin Templeton in Toronto, called the outcome “a bit of a pushback on the current situation and the current administration rather than a strong acceptance of the Democratic platform.” He noted the votes were “rented, not owned” and that the initial market drawdown reversed within hours.
BeiChen Lin, Seattle-based director and head of Canadian investment strategy at Russell Investments, underscored that election years, midterm or presidential, tend to produce similar equity market outcomes to non-election years. For example, S&P 500 performance across all three types of years averages out to roughly the same result, he said, which should temper the impulse to trade around political events.
“What really drives market outcomes is more about the economic fundamentals that are in play in that given moment rather than necessarily purely a function of who’s atop the White House or who controls Congress,” said Lin.
Leading up to Tuesday’s midterm elections, betting markets had priced in better than 90 per cent odds that Democrats would take at least one chamber, with 70 to 80 per cent probability on both. That baseline has now been confirmed, leaving a Republican president facing a Democrat-controlled Congress and the prospect of legislative gridlock.
What gridlock means for institutional portfolios
But Lin argued that gridlock is not the drag investors might assume, noting that a divided government forces compromise, produces more moderate policy proposals, and raises the odds that the status quo holds – all of which reduce the uncertainty markets punish most, he said.
“One of the things that the markets really dislikes is uncertainty,” he said. “If you have an environment where your control is split between 2 parties, that can help alleviate some of that uncertainty,” Lin added.
Yet Greenberg cautioned against reading the result as a mandate for a hard-left platform. The Democratic party’s advantage may prove short-lived if it overreaches, particularly as executive orders still give the president tools to block legislation, and 2028 is only two years away.
Meanwhile, markets have already moved on from an initial drawdown to a sharp rally. A divided government that produces gridlock is not necessarily bad for stocks, Greenberg noted, and a lame duck period through January could cool appetite for conflict with Iran and dial back trade skirmishes with allies.
Why the AI buildout and US deficit are the real market risks
One area he flagged as a direct market risk is state-level pushback against AI data centre construction, particularly in Texas. AI capital expenditure has been a significant driver of US economic growth and stock market concentration.
“If we do get a slowdown in data center buildout, you would think all else equal, that’s going to be a bit of a hit, not a disaster or a recession, but a hit to US economic growth because that’s been a pretty good driver,” said Greenberg, adding that a forced slowdown could cut both ways – companies issuing debt to build data centres might benefit from pulling back, while firms trying to adopt AI technology could face higher costs as supply tightens.
“I don't think it's going to be a full-scale halt on data centers in the US. I think there's just going to be a little bit more thoughtfulness on making sure that it's good for the community. I think that's one area that will have some direct impact on markets because it's just been such a big driver of the US market,” he added.
On the fiscal side, Lin said the trajectory of US debt and the deficit is the more consequential variable for bond and equity markets. He highlighted how long-term Treasury yields have climbed over the past three to six months as investors question where the deficit is heading.
A divided government cuts both ways on that front, he said, adding it could block meaningful deficit reduction, but it could also prevent the deficit from growing faster. He pointed to the 1980s as precedent, when Social Security had roughly six months of runway left and Congress came together across party lines to gradually raise the retirement age, extending the program’s solvency into the early 2030s.
He added that if a compromise does materialize, “that would actually result likely in a reduction in long-term Treasury yields,” which would benefit both fixed income and equities, Lin noted.
“The economic fundamentals are going to be a huge determinant of what happens to the markets in 2027,” he said, noting Russell Investments expects the US economy to grow at or above trend next year, supported by healthy labour markets, resilient consumer spending, and corporate earnings growth of roughly 30 per cent year over year in the US and 70 per cent in emerging markets.
“That creates a backdrop that is very supportive for financial markets going forward,” he added.
The case for US equities hasn’t changed
To that end, Greenberg underscored the US economic picture remains broadly supportive – solid growth, low unemployment, and strong corporate earnings – even if that growth is K-shaped and unevenly distributed.
For him, the bigger concern, and one that predates the election, is concentration. His team had already begun diversifying away from the tech heavyweights that dominate the index, adding exposure through systematic equity factors, value strategies, and mid- and small-cap holdings. Greenberg suggests the midterm result reinforces that approach rather than changing it.
He noted that much of the technology sector, including semiconductors and AI-enabling stocks, has already sold off from its highs, which he believes some of the negative news may already be reflected in prices. The question now is not whether to cut US equity exposure but whether to push diversification within the US market a step further.
Greenberg added that elections feel decisive in the moment but tend to fade as drivers of performance. The trajectory of economic growth, inflation, monetary policy, and corporate earnings will matter more in the weeks and months ahead, particularly if divided government means less legislative action overall, said Greenberg.
“It’s always amazing what US corporations can manage through and how they can deal with whatever comes their way,” he said. “It’s a very resilient, innovative, backdrop in the US for capitalism and for private sector companies. I think you just want to make sure you're not overly concentrated and hence have some diversification in other parts of the US market, but also geographically as well.”
That’s why Lin urged plan sponsors to think about US equity exposure in terms of what it represents – a proportionate share of a company’s future cash flows stretching out over decades, rather than a bet tied to any single political cycle.
On that basis, the midterm result should carry little weight in allocation decisions, said Lin.
He acknowledged that US equity valuations look less attractive than those in developed international markets, Canada, or emerging markets. But the US still offers greater exposure to early-stage technology companies and a degree of insulation against economic shocks that other regions lack.
Looking ahead to the lame duck period and into 2027, Lin said the main risk to watch is not the political calendar but the possibility of sudden geopolitical shocks. Despite Russell’s 12-month outlook for global equities remaining positive, he acknowledged the real probability of dislocations over the next year.
“There is always that not insignificant probability that we do get a shock episode here or there or geopolitical event here or there, and that could cause a temporary dislocation in the markets. But in those periods of temporary dislocations and when everyone else is panicking, that's the time when we think investors really need to stay in the game,” Lin said.
