Political and Policy Volatility on the Rise

Recent elections in the U.S. and dynamics in Europe highlight rising political volatility and the potential for divergent policy shifts. Investors should prepare for further turbulence ahead.

While last week’s tech-led sell-off is yet another example of the equity market volatility investors have been contending with throughout the year, recent elections in the U.S. and political dynamics across Europe show political volatility is on the rise and heading higher than we have seen in decades.

The November 4 election of Democratic socialist Zohran Mamdani as the new mayor of New York City is a fresh example of how volatile the political environment is in the U.S., with the striking recent rise of rightwing populist parties in France, Germany and the U.K. demonstrating the breadth of this development.

This may not be front of mind now as U.S. equity markets gyrate over concerns over AI—a topic we covered recently AI: Boom? Bust? Or Both?—and the risk of a hawkish pivot by the Federal Reserve. But as we look toward 2026, political volatility across key western economies will need to be closely watched by investors as it poses important implications for policy decision-making and risk markets.

Polarization and Policy Swings

Political volatility may feel commonplace in the U.S. and around the world, but Mamdani’s victory provides a fresh jolt and tangible reminder of its underlying causes.

Despite an economy in decent shape, economic anxiety among voters has been rising and shifting across a broad base. At its simplest, we can view this shift as ‘blue-collar’ workers impacted by automation gravitating toward right-leaning populism, while ‘white-collar’ workers facing a tougher job market are being drawn more toward the political left.

What this ultimately points to is the end of the post-war consensus era in political leadership. The political divides are now greater, increasing tail risks and uncertainty around policy trajectories in a way we have not seen over at least the past 50 years. Indeed, there has been more agreement than not among ruling political parties, creating greater stability and certainty in policy direction and decision-making.

As this new era of political division develops, several areas show meaningful read-through, financial, energy, technology/AI and antitrust policy chief among them.

Financial regulatory regimes can be heavily influenced by changes in political leadership, e.g., stricter oversight under progressive administrations versus a more deregulatory bias under conservative administrations. Shifts in supervisory intensity, capital requirements, consumer protection rules and enforcement priorities can alter cost of capital, lending growth and profitability across the financial sector.

Energy policy presents similarly sharp contrasts. Climate‑first approaches imply tighter emissions standards, accelerated renewable deployment and a changing investment mix; fossil‑fuel‑friendly policies typically aim to reduce permitting friction and support traditional energy production. These swings can influence capex decisions, project economics and commodity paths, and can often also serve as the transmission channel for geopolitical shocks via energy prices.

On the technology/AI front, a patchwork of state‑level rules is already emerging; stricter regimes are being contemplated in states such as New York, California and Colorado versus looser frameworks in Texas and Florida. This fragmentation raises compliance costs, complicates product rollouts and can confer uneven competitive advantages depending on where firms operate and where standards coalesce. Divergent approaches to antitrust policy under different administrations also matter, reshaping the competitive landscape for large‑cap tech and influencing broader market structure dynamics, from M&A viability to platform conduct.

Investment Implications

Amid higher political volatility and policy uncertainty, investing becomes more complex, affecting time horizons, portfolio construction and asset allocation.

Investing for the long term should remain a core principle, but the environment argues for greater agility, e.g., shorter tactical horizons and flexible allocations to navigate regime shifts without abandoning strategic objectives.

At the company and industry level, the priority is resilience to policy swings. Investors should assess policy sensitivity across sectors, recognizing that financials, energy and large‑platform tech typically carry higher “policy beta” than many other industries. The preference is to tilt toward business models with diversified revenue sources, adaptable cost structures and robust balance sheets that can absorb regulatory or fiscal shocks.

As part of this, building clear policy scenarios into portfolios and risk budgets is warranted; consider progressive versus conservative control at federal and state levels. Stress-test how these paths could affect revenues, margins, investment plans and the cost of capital. Scenario‑based position-sizing can help manage the wider dispersion of outcomes and the higher tracking error that accompanies policy‑sensitive views.

To support the approach, use cross-asset diversification to help manage risk and ensure adequate liquidity. Public markets provide greater ability to adjust positions quickly to policy shifts, while private markets tend to exhibit more constrained exit optionality.

Volatility Demands Agility

Political volatility is now a central feature of investing, not background noise. With the U.S. midterm elections approaching, the pace and visibility of policy shifts are likely to increase, raising both risk and opportunity.

For investors, it’s imperative to be prepared to act with agility as the policy cycle turns. Those who combine long‑term discipline with tactical flexibility will be better positioned to protect capital and capture opportunity in an environment defined by wider policy outcomes and faster market repricing.