Any stock market dips after the US midterms are likely to be buying opportunities

The US stock market has been jittery lately. Some market pundits warn that the bull market is topping out and that a bear market is probably starting now or early next year.

Many of those forecasters draw such a perspective from technical analysis, which has occasionally proven accurate. At my firm, we focus on fundamentals. Over the next few weeks, we do see some reasons to expect trouble ahead. However, we expect they will create buying opportunities rather than cause a significant drop in stock prices.

Bear markets usually stem from tightening monetary policy that triggers a financial crisis, which quickly morphs into an economywide credit crunch and a recession.

Admittedly, the US had a bear market in 2022 without a recession. It was relatively short and shallow, making it an excellent buying opportunity. At the time, we thought what seemed to be the most widely anticipated recession ever was unlikely to happen. We were betting on the US economy’s resilience.

We think that is still a good bet. If so, corporate earnings should keep growing and stocks reach new record highs. Over the past couple of years, the bull market has increasingly been led by earnings even as valuation multiples have been falling.

In other words, stocks have got cheaper. Why is that? That’s not a hard question to answer right now. As Halloween approaches, here are some of the reasons that some investors might be taking fright:

First, the US midterm elections will be next week. We wouldn’t rule out the possibility that the Republicans will maintain their majorities in both houses of congress. However, various polls strongly suggest they will lose the House of Representatives and maybe even the Senate.

Stock investors tend to favour gridlock in Washington. This is a feature of the US constitutional system of checks and balances, designed to reduce legislative extremes and the risk of an authoritarian government.

The problem is that politics will probably become even more partisan than it was before the midterms. That could mean more prolonged debt-ceiling crises and government shutdowns.

Another risk is that the midterm results could increase policy uncertainty by unshackling president Donald Trump. With the elections over, he might feel less constrained and more willing to pursue controversial policies through executive action. After all, some of the administration’s most market-disruptive policies, including tariffs, have come from the executive branch.

With or without congressional gridlock, the midterms could clear the way for further policy-driven volatility.

Second, the AI investment boom faces three big constraints: financial, physical and political.

Financial constraints led the recent AI jitters, as investors increasingly questioned whether the returns on huge AI investments would justify the spending and whether enough capital would be available to finance it all. Meanwhile, electricity shortages, limited grid capacity and opposition to data centres threaten to slow the buildout.

The Democrats are likely to intensify scrutiny of data centres. While Trump’s veto would limit federal legislation, restrictions at the state and local level could delay projects and raise costs, weighing on the AI trade.

Third, the president has warned he might re-escalate the war with Iran after the midterms. The risk is that another round of intense fighting could push oil prices past the $120 level reached at the start of the war. Higher-for-longer oil prices would mean stickier-for-longer inflation, forcing the Federal Reserve to raise interest rates higher.

In this scenario, synchronised global bond-yield rises would continue, raising the risk that something breaks in the financial system.

The US economy has passed several stress tests since the beginning of the decade. We think it will continue to do so. A more divided government isn’t likely to slow the economy. Sure, federal deficits are too big, but they are also very stimulative.

In my view, taking some of the air out of the AI bubble would be a positive development. For example, more restricted access to capital should allow more efficient capital allocation and, combined with the other constraints, reduce the risk of over-investment.

Importantly, we expect the key players in the investment boom to retain access to financing and to keep spending.

If the economy passes the latest stress tests, corporate earnings will too. So the earnings-led bull market would remain intact. Any significant pullbacks caused by frights should be buying opportunities. – Copyright The Financial Times Limited 2026

The writer is president and chief investment strategist at Yardeni Research