Three Policy Themes for 2026
Presidents tend to enact economic stimulus policies in the first year of their presidencies ‒ when their political capital is the highest ‒ to accelerate economic growth in their second year (the midterm election year). In year two, given the economic cushion that is in place, presidents tend to become more populist as they are often underwater with voters heading into the midterm elections. So far, 2026 is proving no different, with the president offering populist policy solutions, such as a cap on credit card interest rates and banning institutional investors from buying single-family homes, as he looks ahead to the midterm elections.
“Shock-and-awe” economic policy will be the 2026 backdrop. US economic policy is shifting away from the austerity caused by tariffs in 2025 to stimulus in 2026. The One Big Beautiful Bill Act enacted in July included both consumer and business tax cuts that were designed to offset the negative economic impact of the tariffs. However, there was a timing mismatch for the consumer. Rather than cutting individual income tax rates directly, which would have had an immediate impact on the consumer, Congress changed tax deductions. As a result, the consumer tax cuts will arrive in the form of tax refunds in early 2026. Consumers will see a 44% increase in tax refunds in 2026 as compared to 2025 (an incremental $150 billion). In addition, although the business tax cuts were made retroactive to January 2025, we expect more businesses to take advantage of the provisions this year. Given the significant economic stimulus coming in 2026, in combination with a Federal Reserve that has been lowering interest rates, U.S. economic growth should accelerate.
Populist proposals will feature prominently. Historically, the president’s party loses an average of 28 seats in the House of Representatives in the midterm year. Today, Democrats need to win just a net three seats to win control of the House. Affordability has been a key issue in recent elections and it will remain a key issue in the 2026 midterm elections. Hence, the president is focused on how to lower costs for consumers, offering policy proposals to lower housing, health care, and electricity costs. Not all of these policy priorities will be enacted, but they create policy uncertainty, which impacts markets.
The market is more volatile in midterm years. Presidents becoming more populist in the second year of their term is one reason that midterm election years have larger intra-year equity market drawdowns than the other three years in the presidential cycle (19% on average rather than 12-13% in the other three years). Despite generally accelerating economic growth in midterm election years, the equity market becomes more defensive. Still, that volatility has tended to become a buying opportunity; the S&P 500 has not declined in the 12 months following a midterm election since 1938.
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