Geopolitical Risk and Its Impact on Global Markets: Strategic Sector Positioning Ahead of the U.S. Midterm Elections

The interplay between U.S. midterm elections and geopolitical risk has become a defining feature of global markets in 2024–2025. As the political landscape shifts and trade policies evolve, investors face a complex calculus of opportunities and threats. The recent U.S. election outcome, with former President Donald Trump’s return to prominence and a Republican-controlled Senate, has amplified uncertainties around tariffs, fiscal policy, and international alliances. Meanwhile, geopolitical tensions—particularly with China and regional conflicts—continue to strain global supply chains and inflationary pressures. This analysis explores how these dynamics shape sector performance and outlines strategic positioning for investors navigating this volatile environment.

The Current Landscape: Policy Uncertainty and Geopolitical Tensions

The 2024 election has set the stage for a policy-driven market environment. Trump’s proposed 60% tariffs on Chinese goods, as highlighted by Amundi Research Center, risk triggering retaliatory measures and deepening trade wars, which could disrupt global manufacturing and elevate inflation [3]. Conversely, a Harris administration might prioritize continuity in strategic tariffs, offering some stability to markets. However, the broader geopolitical context complicates this picture. J.P. Morgan Research notes that trade policy shifts and heightened tensions have already caused a broad-based downshift in global growth, with industrial activity slowing and inflationary pressures shifting toward the U.S. [1].

The Federal Reserve’s cautious stance, driven by these pressures, underscores the macroeconomic stakes. Deloitte’s Q2 2025 U.S. Economic Forecast outlines three scenarios: elevated tariffs could moderate GDP growth and raise unemployment in the baseline case, while lower tariffs might ease inflation and support business investment in an upside scenario. A downside scenario, however, warns of a recession triggered by higher tariffs and fiscal austerity [2]. These divergent outcomes highlight the need for agile portfolio strategies.

Historical Context: Midterm Volatility and Sector Resilience

Historical patterns reveal a recurring theme: midterm elections amplify market volatility. Baird Wealth Management reports that the S&P 500 typically experiences an average intra-year decline of 19% in midterm years, far exceeding the 13% average in other years of the presidential cycle [4]. This volatility is exacerbated by geopolitical risks, as seen in 2022, when the Russia-Ukraine war and inflationary shocks deepened corrections. Yet, post-midterm recoveries have historically been robust, with the S&P 500 averaging 32% gains within a year of elections [4].

Sector performance during midterms reflects shifting investor priorities. Defensive sectors like utilities and consumer staples tend to outperform in uncertain environments, while cyclical sectors such as technology and industrials often rebound post-election [1]. For instance, MSCI notes that under a status-quo scenario—where the same party retains congressional control—defensive strategies see sharper declines, suggesting that policy clarity reduces the need for safe-haven allocations [2]. Conversely, under a Trump administration, financials and consumer discretionary sectors could benefit from tax cuts and deregulation, while import-reliant sectors like consumer goods face headwinds [3].

Strategic Sector Positioning: Balancing Risk and Opportunity

Given these dynamics, investors must adopt a dual approach: hedging against geopolitical risks while capitalizing on policy-driven opportunities.

1. Defensive Sectors in a High-Risk Environment
   Geopolitical shocks disproportionately affect energy and emerging markets. The IMF reports that emerging market equities typically decline by 5 percentage points during conflicts, twice the drop in advanced economies [5]. Energy markets, however, remain a wildcard. While short-term spikes in oil prices are likely during regional escalations (e.g., the 2025 Israel-Iran tensions), long-term volatility depends on the U.S.’s ability to offset supply shocks through domestic production [1]. Defensive allocations in utilities and healthcare—sectors less sensitive to trade policy—could provide stability.

2. Growth Sectors in a Policy-Driven Recovery
   BlackRock’s 2025 Thematic Outlook emphasizes the potential for rate-sensitive assets like biotech, bitcoin, and gold to thrive amid policy shifts and rate cuts [4]. The Infrastructure Investment and Jobs Act (IIJA) is expected to accelerate investments in manufacturing and AI infrastructure, creating tailwinds for technology and industrials. Additionally, AI-driven innovation, supported by both Trump and Harris platforms, could unlock new growth avenues, though regulatory risks remain under a Harris administration [3].

3. Navigating Tariff Scenarios
   Deloitte’s three scenarios for tariffs highlight the need for scenario-based planning. In a high-tariff environment, investors might overweight domestic manufacturing and infrastructure while underweighting import-dependent sectors. Conversely, lower tariffs could favor global supply chain players and emerging markets. Gold and U.S. Treasuries, as safe-haven assets, remain critical hedges against geopolitical uncertainty [5].

Conclusion: A Prudent Path Forward

The 2024–2025 period demands a nuanced approach to portfolio construction. While geopolitical risks and midterm uncertainties create headwinds, they also generate opportunities for those who can anticipate policy shifts and sector rotations. Defensive positioning in utilities and healthcare, coupled with selective exposure to AI-driven growth and infrastructure, offers a balanced strategy. Investors must remain agile, continuously reassessing their allocations as trade policies and geopolitical dynamics evolve.

Source:
[1] Mid-year market outlook 2025 | J.P. Morgan Research [https://www.jpmorgan.com/insights/global-research/outlook/mid-year-outlook]
[2] United States Economic Forecast Q2 2025 [https://www.deloitte.com/us/en/insights/topics/economy/us-economic-forecast/united-states-outlook-analysis.html]
[3] 2024 US Elections Investment Views | Amundi Research Center [https://research-center.amundi.com/article/2024-us-elections-macro-geopolitical-and-investment-perspectives]
[4] 2025 Thematic Outlook: AI & Geopolitics - BlackRock [https://www.blackrock.com/us/financial-professionals/insights/2025-thematic-outlook]
[5] How Rising Geopolitical Risks Weigh on Asset Prices [https://www.imf.org/en/Blogs/Articles/2025/04/14/how-rising-geopolitical-risks-weigh-on-asset-prices]