TL;DR:

· Historically, the average U.S. stock market return in the 12 months of a midterm election year is only about 2.9%, below the roughly 8.9% average across all years;

· In the 12 months after a midterm election, the average return rises to about 12.4%; based on statistics since 1950, the S&P 500 has recorded positive returns in all 19 years following midterm elections;

· However, statistical tests cannot prove that the "midterm election" itself is the cause of the rise. The weakness in 1974, 2002, and 2022 was more related to stagflation, the bursting of the tech bubble, and aggressive rate hikes;

· Therefore, the midterm election cycle is better suited as historical context for understanding market volatility, rather than a timing indicator that can be mechanically traded.

The United States will hold its midterm elections on November 3, 2026. As voting day approaches, "will the midterm elections affect U.S. stocks" has once again become a frequently discussed question in the market.

If we look only at historical data, the answer seems quite striking: midterm election years are usually hard to endure, but after getting through the election, U.S. stocks often perform noticeably better.

But what is truly noteworthy is not that "stocks must rise after the election," but rather another layer of questions behind this set of data—to what extent does the political cycle truly determine the market, or is it merely coinciding with economic, interest rate, and earnings cycles?

Midterm election years are often the hardest year in the four-year cycle

For a long time, there has been a so-called "presidential election cycle" phenomenon in the market.

Simply put, in the four-year term of a U.S. president, the second year coincides with the midterm elections, and historical average returns tend to be relatively weak, with greater volatility; the third year, that is, the first year after the midterm elections, is instead usually one of the stronger years in the four-year cycle.

Historical data compiled by Certuity further shows that since 1932, the average return of the S&P 500 in midterm election years has been about 5.8%. More noteworthy is volatility: in the year before the midterm elections, the average maximum drawdown of the market was close to 19%. In other words, even if the full year ultimately ends higher, the process may still involve quite severe declines.

After compiling 31 midterm election cycles from 1900 to 2025, U.S. Bank also reached a similar result: in the 12 months before the midterm elections, the average return of the U.S. stock market was only 2.9%, significantly lower than the 8.9% average return across all years in the sample.

This also means that the truly prominent feature of midterm election years may not be that they are "bound to fall eventually," but rather that returns are weaker, drawdowns are deeper, and the investor experience is worse.

What is truly unusual is this: after the election, the market quickly becomes stronger

Compared with the weakness before the election, historical performance after the election is much stronger.

Data from U.S. Bank shows that in the 12 months after midterm elections end, the U.S. stock market has risen by an average of 12.4%; if only cycles since 1980 are counted, the average gain reaches as high as 17.5%.

Calculated from 1950 onward, this pattern appears even more extreme: in the 19 midterm elections through 2022, the S&P 500 recorded positive returns in all 12 months after Election Day, with a median gain of about 14.5%.

Fidelity data also shows that the second year of a presidential term has historically had the weakest average returns, while the third year, after the midterm elections end, has shown a clear improvement in average performance; this difference has not been consistently linked to victory by any particular political party.

2022 was a typical case.

That year, the Federal Reserve tightened monetary policy at the fastest pace in decades, the S&P 500 fell steadily, and around mid-October it touched its low for the year, only weeks before the November 8 midterm elections. Over the following year, U.S. stocks again posted double-digit returns and eventually set a new all-time high in early 2024.

On the surface, it perfectly replicated the historical script of "fall before the election, rise after it."

But that is precisely where the problem lies.

Did the midterm elections really drive the rally?

Not necessarily.

If 1974, 2002, and 2022 are placed together, it becomes clear that several historically very weak midterm election years all had more direct macroeconomic explanations than the elections themselves.

In 1974, the United States was experiencing stagflation and recession; in 2002, the bursting of the tech bubble was still hitting the market; and in 2022, high inflation and rapid Fed rate hikes together pressured valuations.

U.S. Bank found in its statistics that among 31 midterm election cycles, 11 weak phases were accompanied by inflation shocks, rate hikes, war, financial stress, or economic deterioration. More importantly, after statistical testing of the sample, no sufficiently stable evidence was found to prove that "midterm elections" themselves systematically change stock returns.

In fact, as long as extreme macroeconomic samples such as 1974, 2002, or 2022 are removed, the statistical significance of the return difference around election years weakens markedly.

This means that the so-called "midterm election rally" may, at least in part, actually come from another mechanism: the market often has already gone through a round of economic adjustment, monetary tightening, or valuation compression before the midterm elections, and the high returns after the election happen to be calculated from a lower price base.

In other words, rather than saying the end of the election "created" the rise, it is more accurate to say that the political cycle sometimes happens to overlap with the turning point of the macroeconomic cycle.

Why is a rebound still likely after the election ends?

A common explanation given by the market is: uncertainty declines.

Before the election, investors need to assess multiple possible paths at the same time, including taxes, fiscal spending, regulation, and trade policy; as the election results become clear, although future policy possibilities are not completely determined, the range begins to narrow.

Fidelity summarizes it as: the market does not necessarily trade a particular election outcome directly, but instead reacts to a decline in policy uncertainty.

The second reason is more mechanical.

If a relatively large drawdown has already occurred in the midterm election year, then the 12 months after the election are naturally built on a lower starting point. A low base and mean reversion will, to some extent, amplify subsequent returns.

Therefore, "weak before the election" and "strong after the election" should not really be viewed separately. The strength in the latter half is very likely partly a result of the adjustment in the first half.

Divided government or unified government? The data do not give a clear answer

Another question that often arises is: is it more favorable for the stock market when Congress and the White House are controlled by different parties?

Historical data do not provide a stable answer.

U.S. Bank examined different combinations of political control since 1948 and found that during periods when one party controlled both the White House and Congress, the average three-month return of the S&P 500 was about 2.42%; when different parties separately controlled government institutions, it was about 2.17%, and the overall difference was not statistically significant.

This also shows that directly converting "divided government" or "unified government" into bullish or bearish signals is not sufficiently supported.

Political outcomes can of course significantly affect specific industries such as energy, healthcare, finance, and defense, because changes in tax rates, regulation, and fiscal spending will alter corporate earnings expectations; but policy effects at the industry level do not mean that the overall direction of the S&P 500 can be directly inferred.

How should the more than 70-year "perfect record" be viewed?

"Since 1950, the S&P 500 has risen in all 19 instances in the 12 months following midterm elections" is certainly a very eye-catching statistic.

But it also has a problem that is easy to overlook: 19 instances are still only 19 samples.

Moreover, if the starting point of the statistics is pushed earlier, or the observation window is changed, both the win rate and the average return will change. The reason different institutions arrive at post-election average gains of 12%, 14%, 16%, or even higher largely also comes from differences in start and end dates, index definitions, and whether dividends are included.

Therefore, the real information provided by this historical pattern is not that "you can buy right after voting ends in November."

A more reasonable understanding is: market volatility around midterm elections has historically tended not to last too long, and the core variables that determine the subsequent market trend will ultimately return to economic growth, inflation, interest rates, and corporate earnings.

Political events can create short-term uncertainty, but what the market prices over the long term is still cash flow and macroeconomic fundamentals.

From this perspective, what is truly worth observing about the 2026 midterm elections may not be whether the S&P 500 rises immediately after voting ends on a certain day, but where the U.S. economy, interest rates, and corporate earnings stand at that time.

The historical pattern of "weak before the election, strong after" does indeed exist. But it is more like a market phenomenon worth understanding than a clock that can be traded mechanically.

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