Wall Street sets the midterm election price: Democratic Party factors surge 20%, but the market remains in a "blind zone"

Wall Street has already placed a clear price tag on the upcoming U.S. midterm elections.

On October 16, prominent financial analysis platform ZeroHedge summarized the latest reports from major investment banks, noting that JPMorgan’s “Democrat Factor” has surged about 20% since August, while during the same period, the S&P 500 index has risen only 2.6%. This severe disconnect between micro and macro perspectives is becoming a core focus of debate within Wall Street.

Prediction platform Polymarket currently prices the probability of a Democratic sweep of both chambers at approximately 64% to 65%; Goldman Sachs’ average forecast, combining Kalshi and Polymarket data, also reached a high of 65% around October 8.

This probability hovered near only 23% in fund manager surveys just two months ago, but has now jumped to become the market’s baseline scenario.

Manish Sinha, Delta-One strategist at JPMorgan, points out that if the factor’s volatility is increased to match that of the S&P 500—essentially leveraging it about six times for a risk-equivalent comparison—its annualized return rate would be as high as 170%, far exceeding the roughly 15% performance of the broader market.

It is worth noting that this trend is driven almost entirely by company-specific factors at the stock level, with no significant correlation to AI speculation, momentum trading, interest rate trends, or systematic market risk.

This means that election risk has been successfully isolated and defined by Wall Street as a long-short hedging tool, circulating among institutions purely in the form of excess returns; in contrast, the index-level pricing of U.S. equities remains anchored to the “divided Congress” scenario as the old baseline.

“Democrat Factor” Construction Logic

According to JPMorgan’s report “U.S. Election Series—Midterm Elections” published on September 30, 2026, this factor was constructed under the guidance of Delta-One derivatives strategist Manish Sinha. The core framework was initially set up during the 2024 U.S. presidential election, optimized and reactivated for the current midterms.

Specifically, the construction method involves quantitatively scoring approximately 3,000 U.S. stocks, measuring each stock’s sensitivity to changes in winning odds on the Polymarket prediction platform, and assigning a corresponding “election score.”

The scoring results are then optimized into two liquid long-short hedged baskets: the Republican Factor (JP9REPP) and the Democrat Factor (JP9DEMP).

Both baskets are designed to be “neutral” to the overall market, aiming to precisely capture stock-specific price fluctuations directly related to the elections.

As of the end of September, the Democrat Factor had gained 19.45%, corresponding with the probability of Democrats winning the Senate on Polymarket breaking 60%, while the Republican Factor fell 14.57% during the same period.

JPMorgan’s attribution analysis further reveals that the majority of this factor’s rise came from stock-specific components, and that traditional risk factors such as momentum, rate sensitivity, and market systematic risk have little explanatory power for its performance.

In his October 7 report, Sinha emphasized that the factor “remains overall neutral to systematic market risk, momentum, and other macro factors”, listing it as a core tool for capturing tactical excess returns from election themes.

Odds Soar from 23% to 64%, but Historical Patterns Indicate Pullback Risks

What has fueled this factor’s rapid ascent is the dramatic shift in prediction market odds.

A Bank of America survey of fund managers in August showed only 23% of respondents expected a Democratic sweep of both chambers, with 47% anticipating a “Republican Senate/Democratic House” split.

Yet by September 4, Kalshi’s pricing of sweep odds had shot up to 47%, and by the end of September to early October, Goldman Sachs' calculated average platform win rates had climbed to around 65%.

Bank of America chief strategist Michael Hartnett, in his latest weekly fund flow report, also recorded Polymarket’s sweep probability at 64%, a significant increase from September’s 49%.

However, Goldman Sachs strategist Alec Phillips, in the October 8 report “U.S. Election Monitor,” cited historical data showing that in prior midterm elections (2002, 2006, 2010, 2018, 2022), prediction markets at this stage have a tendency to overestimate the challenging party’s odds of a sweep, with an average drop of about 5 percentage points between early October and Election Day.

If this average historical pullback is applied to the current baseline forecast of about 63%, the probability of a Democratic sweep might retreat to the low-to-mid 50% range.

Meanwhile, final control of the Senate majority will depend on key states such as Alaska, Texas, Ohio, Iowa, and Kansas.

Goldman Sachs specifically warns that midterm polls tend to overestimate the Democrats in Democrat-leaning states and Republicans in Republican-leaning states, matching the historical pattern of conservative voters “rallying late” before Election Day.

CNN senior political commentator Harry Enten also points out that Republican voter registration advantages in Arizona, Nevada, North Carolina, and Pennsylvania have reached their highest levels in at least two decades for a midterm election year.

Specific Long and Short Position Targets

JPMorgan’s Delta-One team, in its scenario strategy basket codenamed JPMDC26P, has detailed the policy impact of “Democratic control of Congress” on various sectors:

• Long positions: Managed care and hospital stocks benefiting from expected extension of Affordable Care Act premium tax credits, as well as lower-end consumer stocks supported by affordability policies;

• Short positions: Small and mid-cap defense stocks, capital market-related stocks (due to greater focus on regulation and investigation over deregulation), energy permit beneficiaries, and crypto-related stocks driven by the CLARITY Act.

The short-term trend in the crypto sector has already previewed this logic: in mid-September, when the Senate rejected the crypto market structure bill, all Democratic senators voted against, and the market promptly experienced a sharp decline.

Bank of America strategist Hartnett's assessment of the overall situation is more direct. He believes a Democratic sweep “marks a shift from populist capitalism to populist socialism,” implying “future tax and regulatory policy will generally tighten, directly impacting corporate earnings per share negatively.”

His top recommended hedging tool is to short financial stocks and the U.S. dollar—very much in line with JPMorgan’s shorting strategy in the capital market sector.

U.S. Market: The Great Divide Between Two Camps

Regarding the impact of the midterm elections on the U.S. equity market, the sell-side has split into two clear camps:

The Optimists, represented by JPMorgan’s Andrew Tyler.

Tyler argues that even if Democrats sweep both chambers, they will still fall far short of the two-thirds majority needed to overturn a presidential veto. The actual political landscape will resemble the final two years of Biden’s presidency, the late Trump 1.0 period, or Obama’s final two years—all scenarios where the market typically responds positively as “mild/power-balanced.”

Tyler suggests that if the market pulls back before or after the election, it should be seen as a buying opportunity. He cites historical data: since 1990, the S&P 500’s average returns in the 3, 6, 9, and 12 months after midterm Election Day are 5.4%, 11.4%, 12.5%, and 14.7% respectively; across all 19 midterms since 1950, the index has delivered positive returns over the 6, 9, and 12 months post-election 100% of the time. Goldman Sachs likewise views midterms as potential “risk-clearing events,” noting that the median equity market drawdown in the month before the election is 3.5%, while the median gain in the four months after is 6.5%.

The Cautious Camp, represented by Bank of America’s Hartnett.

In Hartnett's scenario forecasts, a Democratic sweep corresponds to a “major risk-off” setting, potentially sending U.S. equities down more than 10%, with the dollar and Treasury yields falling together and overseas equities outperforming.

He asserts that a “Republican Senate/Democratic House” split corresponds to “improved risk appetite,” arguing that “a divided Congress is akin to a moderate growth Goldilocks scenario, with U.S. equities likely up about 5%. A Republican sweep would be the most positive surprise.”

Goldman Sachs custom baskets head Louis Miller also warns:

As the midterms approach, the election outcome is likely to be negative for risk assets.

The root of the divergence between the two camps: historical average returns include a large share of “divided Congress” scenarios, but the forecast market currently prices at roughly two-thirds for a risk-off “Democratic sweep,” breaking historical patterns.

Yet the broad market appears indifferent—having gained 13.4% year-to-date, its behavior suggests it is still priced for a “divided Congress” as the base case.

The Real Pricing Error Lies in the Index, Not the Factor

ZeroHedge argues that, overall, the “Democrat Factor” is now an extremely crowded trade. It has fulfilled its historic mission, monetizing the sweep probability from just over 20% (“coin toss” territory) to a 64% base case; but further profits from current levels are becoming much harder to achieve.

Goldman Sachs' historical data implies a natural mean-reversion of about 5 percentage points, the poll bias in conservative-prone states introduces downside “tail” risk for Senate forecasts, and the odds on platforms like Polymarket have largely peaked.

By comparison, the most significant pricing error may be found at the index level. If Hartnett’s view holds—that a Democratic sweep triggers a market pullback of more than 10%—while the U.S. market is still priced for a benign “divided Congress,” then the most cost-effective hedging strategy is clearly to protect against a market downturn (e.g., by buying index puts or shorting financial stocks), rather than chasing a “theme factor” that has already soared 20%.

There are still about 22 days left until the November 3 Election Day.