Friction in Washington should not be counted as a threat to stock performance in 2026 just yet. Markets are on a roll heading into the new year, with the S&P 500 hitting new intraday highs and closing highs in the last week alone. Year-to-date, the broad market index has soared nearly 18%, following double-digit gains over the past two years. But that optimism, fueled by hopes for further interest rate cuts, increased capital spending through the One Big Beautiful Building Act and a “robust” pipeline of mergers and acquisitions, could be thwarted by political polarization, said Bill Fitzpatrick of Logan Capital Management. “Political polarization is one of several factors that could actually scare off U.S. companies,” the portfolio manager said in an interview with CNBC, adding that such a move would “certainly cause a rotation into higher quality assets.” “The market has basically priced in trading and capital spending to occur with little interruption, and I think that’s a risk for investors,” Fitzpatrick said. Are we on the verge of another shutdown? The market has already faced some disruption during the recent shutdown, which ended on Nov. 12 at 43 days, the longest in U.S. history. Ed Mills, Washington policy analyst at Raymond James, said that while much of the spending bill has passed Congress, it has stalled progress on other bills, meaning a partial shutdown is “still a possibility” in the new year. This year’s suspension began when Senate Democrats refused to vote on a funding bill that would not extend the Affordable Care Act’s tax credit enhancements. The subsidy, which is set to expire at the end of this year, remains in the spotlight. Earlier this month, four moderate House Republicans joined Democrats in pushing for a vote on extending these tax credits. If approved by the House and Senate, the bill would extend the period for three years, but there are still unresolved issues surrounding its passage. “I think we’ll still be fighting for health care in January,” Mills told CNBC. “That’s where they’re primarily confined.” That could be bad news, especially for companies in the healthcare sector. Health care, the top S&P 500 sector up about 15% over the past three months, is down nearly 1% this month. .GSPHC Mountain 2025-12-01 S&P 500 Healthcare, Month to Date “Hospital stocks have been volatile lately…as politicians debate whether to maintain certain subsidies that have supported low-income patients…to help patients or not,” said Jed Ellerbrook, portfolio manager at Argent Capital Management. “Republicans are considering letting the bill expire, while Democrats want to keep it. President Trump is going back and forth on what he wants to do.” “So I think President Trump’s influence on the market will remain very high.”This year, a lack of federal funding has created a number of challenges, including thousands of flight delays and cancellations due to a lack of air traffic controllers. Other federal employees were also working without pay, contributing to the slump in consumer spending. In fact, USAA Bank found that overall military and federal employee spending was down 6% to 8% year over year in October. Since the short-term funding bill only lasts until the end of January, consumers may change their spending again, which could ultimately impact investor sentiment. “Given the uncertainty, we will continue to see very cautious spending during the holiday season, especially into January,” said USAA Bank President Michael Moran. Beyond a further shutdown Indeed, Logan Capital’s Fitzpatrick believes the market impact of polarization goes beyond a potential partial shutdown. “Gridlock is not new, but it’s just an overhang of an existing thing when you can’t get things done,” he said. This is especially true given that 2026 is a midterm election year, as the Stock Traders Almanac points out. This past 12 months has been the worst period in history in terms of market performance during a four-year presidential cycle. “There is bipartisan support for reform authorization, there is bipartisan support for infrastructure spending, but that doesn’t mean it will happen next year, because this is an election year and there is mistrust between Democrats and Republicans as to what their priorities would be if passed,” Raymond James’ Mills said. “In a midterm election year, the minority doesn’t want to give the majority victory,” he said.
