Race to the midterms has begun

Bottom Line

President Trump laid down the gauntlet in his State of the Union address before Congress this past Tuesday night. At 107 minutes, it was the longest such speech in history and arguably one of the most partisan in recent memory. In sharp contrast, Gov. Abby Spanberger of Virginia delivered the Democratic response afterwards in a tight 12-minute presentation addressing three key issues.

Table stakes are high President Trump’s approval ratings are now under water across the board, from his overall job approval to his handling of the economy, foreign policy, immigration and inflation, all of which were in positive territory during the 2024 election. 

The political pendulum usually swings away from the White House in the midterm elections. At present, Republicans hold an extremely narrow four-seat lead in the House of Representatives, with three open seats. In the midterm elections from FDR in 1934 to Joe Biden in 2022, the party out of executive power has gained an average of 27 seats. Only Bill Clinton’s Democrats in 1998 and George W. Bush’s Republicans in 2002 managed to gain seats in recent decades.  

Three times a charm? President Trump endeavored to use his platform Tuesday night to make the economic case that he should be only the third president over the past 90 years to buck that historical trend. He stuck to the teleprompter in a solid speech, lauding a golden age for America — with a roaring economy and a secure border — as he took credit for engineering an economic turnaround for the ages. 

President Trump set a celebratory tone early, basking in the patriotic glow of the gold-medal-winning Olympic men’s hockey team, who were his invited guests in the visitors’ gallery. Chants of “USA, USA” rang through the House of Representatives chamber.

Policy proposals While he reviewed what he believes to be some of his fiscal policy accomplishments over the past year, he discussed several populist ideas:

• Health care – reducing Medicaid prescription drug prices and shifting federal subsidies away from insurance companies to individuals.
• Energy – ratepayer protection pledge, requiring hyperscalers to meet their own power needs as they build out new data centers, without raising electricity prices for consumers.
• Housing – permanently banning institutional investors from buying single-family homes, lowering mortgage rates, and implementing support for first-time home buyers. 
• Retirement savings – new entitlement program under which the federal government will match 401(k) contributions of $1,000 annually for those whose employers (typically small businesses) don’t offer a retirement-savings program.
• Immigration – SAVE America Act would require voter identification and proof of citizenship to vote and end sanctuary city protections.
• Congressional stock-trading ban – prohibits members of Congress from trading stocks, due to concerns about their use of illegal inside information.

Gov. Spanberger’s rebuttal Spanberger, who won her gubernatorial election in Virginia last November by 15 points, raised three questions about President Trump in her televised response just after his speech: 

• Is he making life more affordable? Nominal CPI inflation has declined from a 40-year high of 9.1% in June 2022 to a five-year low of 2.4% in January 2026, but there’s still more work to do. This metric was at 1.4% in January 2021, and the Federal Reserve wants to see core PCE at 2.0% (it’s at 3.0% as of December 2025), so we need more progress on inflation over time. 
• Is he keeping America safe? While the southern US border is secure, Americans are generally unhappy that Immigration & Customs Enforcement (ICE) has aggressively deported illegal immigrants who are not convicted criminals. Further, we need to do a much better job increasing legal immigration to improve employment growth. 
• Is he working on America’s behalf? The University of Michigan’s Consumer Sentiment Index has plunged from 74.0 in December 2024 to 56.6 in February 2026. Measured by political party, Republican sentiment in February 2026 is at 97.1, but Independents are at 50.9 and Democrats are at 41.8. Democrats and Independents are more energized at present, and President Trump’s popularity has clearly waned with these groups. 

America 250 In a midterm election year, the legislative window typically closes over the summer, as members of Congress return home to their districts to run for re-election. This year, we celebrate the 250th anniversary of America, and it’s certainly possible that President Trump will try to pass some additional fiscal stimulus provisions — symbolically on July 4th — to help boost his party’s chances in the upcoming midterms. But some members of Congress may be loathe to hand President Trump and Republicans a victory at that time. 

Consequently, economic strength and lower inflation later this year may be a function of what was signed into law last July 4th in the One Big Beautiful Bill, and how effective those provisions prove to be.    

Increased volatility This political prospect can be unnerving for investors, who just voted consolidated Republican leadership into power in November 2024, to orchestrate their current set of fiscal policies. As a result, stocks typically decline by 5-10% during midterm election years, reflecting this fiscal policy uncertainty. But markets usually discount the midterms by the fourth quarter, as stocks bottom and rally to new record highs into year end and into the following two years.