Raymond James identifies split government as the leading outcome for the midterms

A Raymond James analysis says President Trump’s approval rating has fallen to 38%, a level that historically nearly always leads to a midterm loss of at least one congressional chamber. The firm assigns an 85% probability that Democrats reclaim the House, with a 50% chance of a Democratic House and Republican Senate, 35% for a Democratic sweep, and 15% for a Republican hold. The policy mix implies rising shutdown risk, continued judicial confirmations under a GOP Senate, and potential shifts in tax, oversight, energy, and trade policy.

Analysis

The market implication is less about headline party control and more about policy latency: investors should expect a longer window of fiscal drift, higher shutdown probability, and more volatile appropriations outcomes before any durable legislative regime shift. That combination is mildly bearish for domestic cyclicals with thin margin buffers and high sensitivity to federal demand timing, while favoring companies with non-U.S. revenue, contractual pricing power, or limited exposure to Washington-driven capex delays. The key second-order effect is that uncertainty itself becomes a tax on small- and mid-cap multiples, because these names have less balance-sheet capacity to absorb intermittent funding gaps and regulatory whiplash.

A divided outcome with a Democratic House and Republican Senate is not a true status quo; it likely means more brinkmanship on budgets, more oversight on corporate conduct, and less probability of large-scale tax or trade code changes. That tends to compress the left tail for mega-cap platforms and insurers relative to industrials, defense, and regulated asset bases, because the House can amplify investigative and antitrust pressure without necessarily delivering affirmative policy. Meanwhile, if the current governing bloc retains both chambers, the incremental bear case shifts toward higher tariff enforcement and more domestic-energy favoritism, which would be a relative positive for upstream energy and select freight/logistics names but negative for import-heavy retailers and industrials with long Asia supply chains.

The consensus may be underpricing how quickly markets can re-rate on shutdown risk rather than on the election outcome itself. In the next 3-9 months, the most tradable expression is likely around budget deadlines and committee positioning, not November 2026: each escalation raises the odds of delayed reimbursements, procurement pauses, and weaker confidence data. Conversely, a surprising moderation in approval deterioration or a rapid de-escalation on affordability could unwind the probability skew, but that would need to happen early because historical approval inflection points are hard to reverse once the cycle is set.

Key Decisions for Investors

• Go long XLP / short XLI for the next 6-9 months: consumer staples should outperform industrials if tariff uncertainty and budget brinkmanship keep input costs and order visibility uneven. Target 5-8% relative outperformance with limited macro beta.
• Add a tactical long in XAR or LMT on any pullback ahead of budget deadlines: defense and aerospace procurement tends to be resilient under divided government, and shutdown risk can shift cash flow toward already-authorized programs. Use a 2-4 month horizon with a 1.5x upside/downside skew.
• Short IWM versus long SPY into event risk: small caps should remain the most exposed to policy noise, refinancing sensitivity, and delayed federal activity. The trade works best if shutdown headlines intensify; risk is a rapid relief rally if bipartisan funding progress appears early.
• Buy downside protection on import-heavy retailers or discretionary names via puts on XRT or selected names with high tariff exposure over the next 3-6 months. The payoff is strongest if trade rhetoric hardens or supply-chain costs reaccelerate; stop if policy tone softens meaningfully.
• For a higher-conviction event hedge, own 1-2 month SPX puts around major budget dates and committee milestones. This is less about outright market direction and more about monetizing the volatility spike that typically accompanies fiscal standoffs.