HSBC: US midterm elections may drive sector rotation; high oil prices and interest rates remain key variables for US equities

Why are elections more likely to bring sector rotation?

HSBC believes the midterm elections on 3 November may trigger volatility, but historically, market performance has shown no consistent differences in periods when control of Congress changed, when political deadlock occurred, or when the status quo was maintained.
Even if Democrats win both the House and Senate, the president’s veto power and the 60-vote threshold in the Senate for most bills outside the budget reconciliation process would limit major legislative changes. The bank therefore believes election risk is more likely to come from news events than from a sudden shift in fundamentals.
Congress can still affect fiscal expectations, the debt ceiling, industry regulation and investigative oversight; trade policy may still be advanced through executive authority.

Polymarket odds cited in the report show a roughly 65% probability that Democrats will win both chambers of Congress. HSBC expects Democratic attention to the cost of living, affordable healthcare and oversight could prompt a positive initial reaction in defensive sectors such as consumer staples and healthcare; some of the rotation has already taken place in recent weeks.
On the other hand, there is regulatory pressure on AI infrastructure: New York State has proposed legislation to restrict the construction of new data centers in some areas, citing electricity use, water use and environmental impact. HSBC believes that even if federal regulation is difficult to advance, concerns about tighter state and local rules could weigh on data-center-related companies in the industrials and utilities sectors.

If Democrats control the House and Republicans control the Senate, the two sides could block parts of each other’s policy agendas. HSBC believes this would be the least disruptive outcome for the stock market, with investors still focused on oil prices, Treasury yields, Federal Reserve expectations and earnings resilience.
If Republicans hold both chambers, banks and AI-related companies could rebound as regulatory concerns ease; the Polymarket odds cited in the report are about 8%, the lowest of the three scenarios.
But a Republican sweep could also reignite concerns about widening fiscal deficits: the budget reconciliation process could still be used in 2027 and 2028, and a looser fiscal path could push up long-term yields, putting pressure on valuations.

HSBC maintains its year-end target of 8100 points for the S&P 500 Index, believing that a solid third-quarter earnings season and the potentially positive impact of an Anthropic IPO on the AI narrative could support the market.
The bank also notes that a sustained period of high oil prices, or higher rate expectations and rising yields, would make market conditions more challenging before year-end. The 10-year US Treasury yield fell from a peak of 5.3% to 5.0%; HSBC continues to favor exposure to the energy sector as a hedge against oil-price risk.
HSBC’s multi-asset team has recently reduced its overweight allocation to US equities in cross-asset portfolios.