(Reuters) – U.S. stock futures pointed to strong opening gains on Wall Street on Wednesday after mid-term elections handed the House of Representatives to the Democrats but saw Republicans reinforce their control of the Senate.
After an initially muted reaction from financial investors in the United States and globally, European stock markets turned higher and S&P and Dow Jones futures followed, gaining as much as 0.7 percent.
A House controlled by the Democrats will hamper Trump’s business-friendly agenda and could lead to uncertainty about his administration at a time when investors are already worried that a decade-old bull market may be ending.
But the results for the Republicans were no worse than investors had feared and pointed to a political gridlock that had largely been expected by investors. That left investors free to buy back into a market that had its worst month in seven years in October.
“Given what futures are pointing to right now, I think it’s probably a sign that on balance Republicans have marginally outperformed,” said Geoffrey Yu, Head of UK Chief Investment Office at UBS Global Wealth Management.
“The big question from here is do we add risk. Given how weak markets were in October, there is a slightly stronger case for us to outperform in the short-term.”
Following a steep selloff in October, the S&P 500 remains down more than 5 percent from its record highs, with many investors worried the market could fall further as inflation gathers steam and the Federal Reserve raises interest rates.
Control of the House will let Democrats put Trump’s administration under more intense scrutiny, likely making Wall Street nervous.
Gridlock in Washington will all but eliminate the potential for more tax cuts, which Trump has called for and which many on Wall Street would like. The sweeping corporate tax cuts passed by the Republicans last year have supercharged earnings growth.
Some investors were hopeful that Republicans and Democrats could agree on spending to improve infrastructure, which could boost many companies’ profits and drive more economic expansion.
The Democrats’ ability to prevent Trump from passing new laws may push him to focus more on resolving U.S. disputes with China, other investors said.
In Tuesday’s trading session, the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite each added between 0.63 percent and 0.68 percent.
“Now that the elections are behind us, earnings and the Fed will be back in focus,” said Mohannad Aama, managing director at Beam Capital Management in New York. “Neither of those factors support expanding multiples for stocks.”
Additional reporting by Daniel Bases, Saqib Ahmed, Sinead Carew, April Joyner in New York and Sruthi Shankar in Bengaluru; Editing by Simon Cameron-Moore