U.S. stocks rallied on Wednesday after the midterm election results came in about as expected, lifting a cloud of uncertainty that was weighing on the market.

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Democrats won back the House of Representatives while Republicans retained control of the Senate, as the midterm’s outcome split Congress. Investors were bullish following the result due to the belief that gridlock in Washington will help the market. Investors expect President Donald Trump’s business-friendly policies to continue, while some expressed optimism about Congress providing a larger check on Trump’s more disruptive market actions, such as the trade battle with China. Historically, equity markets see strong returns when Congress is divided.

Dan Deming, managing director at KKM Financial, said the fact the election played out as expected “gives the administration some ability to keep initiatives alive. I think it will be positive in the near term.”

The Dow Jones Industrial Average rose 161 points, led by UnitedHealth and Pfizer. The Dow was up 3.7 percent for the year through Tuesday after an October sell-off leading up the election cut into its returns.

The S&P 500 gained 0.9 percent as health care rallied nearly 2 percent. The Nasdaq Composite rose more than 1 percent. Relief that Republicans held onto the Senate also helped boost stocks, as some investors feared a so-called blue wave clamping down on Trump’s agenda.

“The mid-terms are behind us, and the market now faces its own big test,” said Frank Cappelleri, executive director at Instinet. “Another strong showing today would unleash some bullish technicals. … While we can’t deny this, a straight shot back to the highs still seems unlikely, as volatility historically persists for longer than a few weeks.”

Stocks rallied across multiple sectors, as shares of Caterpillar, Goldman Sachs, Amazon and Alphabet all rose. Caterpillar is seen getting a boost from continued economic growth and the chance that Democrats can temper Trump’s trade war dealings. There’s also some optimism the president will work with Democrats on an infrastructure plan.

Tech shares rose, as a divided Congress could also keep Trump from seriously going after giants like Amazon for being too big and influential on the economy.

Futures fell initially overnight as Democrats took their first seat back in the House and fears of a possible “blue wave” increased. Virginia state Sen. Jennifer Wexton defeated Republican Rep. Barbara Comstock.

But then stock futures rebounded as more results started to come in.

“The pollsters were correct. The markets went into this, given the close, expecting this outcome,” said Quincy Krosby, chief market strategist at Prudential Financial. “Now the market is trying to figure out which sectors will do better.”

Another notable win for the Democrats came early Wednesday as Jacky Rosen won the Nevada Senate seat, beating incumbent Republican Sen. Dean Heller.

Meanwhile, the Federal Reserve is kicking off a two-day meeting on Wednesday. Worries around the pace of interest rate hikes last month saw global markets hit with sharp bouts of volatility. Markets have been pricing in a higher probability of the Fed raising rates again in December, with further tightening seen through 2019.

Equities in the U.S. closed higher on Tuesday as the elections began earlier in the day.

Defense stocks are also among the expected winners from a divided Congress as it is one of the areas Democrats and Trump may find common ground. Democrats agreed to a Defense Department budget increase for fiscal year 2019.

Art Hogan, chief market strategist at B. Riley FBR, said financials could lose out as the Democrats take control of the House. “In terms of the financials, they might need a bit more deregulation and that is harder to promote under a split Congress,” he said.

Overall, stocks typically do well when Congress is split and the White House is under Republican control. In those instances, the S&P 500 averages an annual return of 12 percent, according to Bank of America Merrill Lynch. “The best case scenario from here, in our view, might be gridlock: do nothing, and undo nothing,” wrote Bank of America Merrill Lynch analysts and economists in a report leading up to the election.

These results could also lead to more investigations into Trump and therefore more stock market volatility.

But regardless of how the elections shake out, this is the best buying opportunity for investors before year-end, said Phil Blancato, CEO of Ladenburg Thalmann Asset Management.

“This is your entry point,” he said, adding that positive seasonal factors, including strong holiday sales, should boost markets higher before the end of 2018. “You might get some volatility in the next couple of days as the market absorbs the result, but you buy those dips. … Everything is telling you this is the time to buy” following the correction in October.

Ryan Browne
Tom Franck
Patti Domm
contributed to this report.

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