The political divide in Washington could send ripples through the market in 2026
Friction in Washington shouldn’t be counted out as a threat to equity performance in 2026 just yet. The market has been strong heading into the new year, with the S & P 500 hitting all-time intraday and closing highs in the past week alone. Year to date, the broad market index has soared nearly 18%, following two prior years of double-digit gains. .SPX YTD mountain S & P 500, year-to-date However, that optimism – supported by expectations for more interest rate cuts, an increase in capital expenditures as a result of the One Big Beautiful Bill Act and a “robust” pipeline for mergers and acquisitions – could be thwarted by political polarization, according to Bill Fitzpatrick of Logan Capital Management. “Political polarization is really one of several factors that, I think, could spook corporate America,” the portfolio manager told CNBC in an interview, adding that such a move would “certainly trigger a rotation into higher quality assets.” “The markets are priced essentially for the deals and the capital expenditures to take place with very little interruption, and I think that’s a risk to investors,” Fitzpatrick said. Another shutdown on the horizon? The market already faced some choppiness during the recent shutdown, which ended after 43 days on Nov. 12 to become the longest ever in U.S. history. While a number of appropriation bills have been passed by Congress, progress has stalled on others in its wake, meaning that a partial shutdown is “still possible” in the new year, said Ed Mills, Washington policy analyst at Raymond James. This year’s stoppage began with Senate Democrats refusing to vote for a funding bill that didn’t extend enhanced Affordable Care Act tax credits . The subsidies, which are slated to expire at the end of this year, remain in focus. Earlier this month, four moderate House Republicans joined Democrats to force a vote on extending those tax credits. The measure, if approved by the House and Senate, would extend them for three years, but its passage remains an open question. “I think come January, we’re still fighting over health care,” Mills said to CNBC. “That’s largely where it’s confined.” That could spell bad news for names in the health-care sector in particular. While health care has been the leading S & P 500 sector in the past three months, rising around 15%, it’s fallen nearly 1% this month. .GSPHC mountain 2025-12-01 S & P 500 health care, month-to-date “Hospital stocks have been volatile lately … because politicians are debating whether to keep certain subsidies that have been supporting lower income … patients or not,” said Jed Ellerbroek, portfolio manager at Argent Capital Management. “Republicans are considering letting them lapse. Democrats want to keep them. President Trump has been back and forth on what he wants to do,” he continued. “So, I think President Trump’s influence on markets is going to remain really high.” This year’s lapse in federal funding created a slew of challenges, such as thousands of flights being delayed or canceled amid air traffic controller shortages. Other federal employees also worked without pay , leading to a pullback in consumer spending. In fact, USAA Bank found that overall spending among military and federal employee members in October declined by 6% to 8% year over year. With the short-term funding bill only lasting through the end of January, consumers could alter their spending once again – a factor that could ultimately have an impact on investor sentiment. “There’s going to be a fair amount of cautious spending, I think, through the holiday season and then particularly into January, just given the uncertainty there,” said USAA Bank president Michael Moran. Beyond another stoppage To be sure, Logan Capital’s Fitzpatrick believes that polarization’s impact on the market goes past a potential partial shutdown. “Gridlock is not new, but it is just an existing overhang when we have an inability to get things done,” he said. That is especially true when taking into account that 2026 is a midterm election year – a 12-month period that has historically been the worst in terms of market performance in a four-year presidential cycle, as noted by the Stock Trader’s Almanac. “There’s bipartisan support for permitting reform; there’s bipartisan support for infrastructure spending, but that doesn’t mean we’re going to get it next year, because it’s an election year, and there’s a distrust between Democrats and Republicans in terms of, if that were to pass, what would the priority be?” Raymond James’ Mills said. “In a midterm election year, the minority does not want to give the majority a win,” he also said.
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