Midterm Elections Approaching: What Really Matters in the Stock Market

Original Title: Midterm Elections and the Markets: What History Says About 2026
Original Author: James Zahansky

Editor’s Note: With just over a month until the U.S. midterm elections on November 3, political uncertainty has once again become a variable in the market. All seats in the House of Representatives will be up for election, and control of the Senate is also at stake, prompting the market to begin pricing in potential changes in fiscal, regulatory, and policy paths that could arise from the future structure of Congress.

However, historical data shows that midterm elections are not simply a "negative event". According to statistics from J.P. Morgan Asset Management, since 1937, the S&P 500 has averaged a 9.2% increase in midterm election years, compared to 13.3% in other years, but the average return remains positive. A more pronounced characteristic is not a decline, but rather increased volatility and a tendency for gains to be more concentrated in the latter half of the year.

James Zahansky, Chief Strategist at WHZ Strategic Wealth Advisors, stated in an article published on September 25 that the real influence of midterm elections on the market is more about the uncertainty leading up to the election rather than the victory of a particular party. As the results become clearer, the political risk premium may decrease, and the market will return to core pricing variables such as interest rates, corporate earnings, and the economic cycle.

This distinction is particularly important for the current market. In 2026, U.S. stocks will face multiple variables including interest rate repricing, energy prices, geopolitical factors, and AI capital expenditures. Attributing year-end market movements solely to the midterm elections can easily overestimate the explanatory power of political events.

The following is a translation of the original text:

With just over a month until the U.S. midterm elections, the market is entering the traditional "political trading" window.

However, historical data shows that midterm elections do not inherently correlate with declines in U.S. stocks. According to J.P. Morgan Asset Management, since 1937, the S&P 500 has averaged a 9.2% increase in midterm election years, while other years have averaged a 13.3% increase. The returns in midterm election years are relatively weaker, but the long-term average remains positive.

A more stable characteristic is greater volatility and a concentration of market movements in the fourth quarter.

Typical Path of Midterm Election Years: Weak in the First Three Quarters, Rebound in the Fourth

From a quarterly performance perspective, the seasonality of midterm election years is more pronounced.

J.P. Morgan's statistics show that historically, the S&P 500 has averaged slightly negative performance in the first three quarters of midterm election years, but averaged a 6.6% increase in the fourth quarter. Data from Capital Group indicates that since 1950, the S&P 500 has averaged a 15.4% increase in the 12 months following the midterm elections.

This data can easily be interpreted as "U.S. stocks rising after the elections", but a more accurate understanding is that as the elections approach, uncertainty is gradually digested by the market, and the risk premium may decrease accordingly.

Before the elections, the market needs to price in future congressional control, fiscal policy, and regulatory paths; as these variables become clearer, the impact of political uncertainty on asset prices often diminishes.

However, historical patterns do not equate to trading formulas.

In 2018, the S&P 500 fell 4.4% for the year, and in 2022, total returns fell by 18.1%. Both of these years were midterm election years, but the core variables affecting the market included Federal Reserve tightening, inflation, and rapidly rising interest rates. The original text emphasizes that the simultaneous occurrence of elections and market declines does not imply that the elections themselves caused the declines.

The Market Trades Policy Paths, Not Party Labels

Another focus of the 2026 elections is the potential change in congressional control.

At the time of this article's publication, the Republican Party holds a slight advantage in both the House and Senate, meaning any seat changes could alter the legislative environment for the next two years. If the White House and Congress are controlled by different parties, the most direct impact is usually not the direction of the stock market but rather an increase in the difficulty of advancing policies.

Large fiscal plans, tax adjustments, and certain regulatory agendas may become harder to pass; at the same time, the importance of congressional hearings, budget negotiations, and debt ceiling discussions may rise. The original text suggests that if a divided government occurs, the policy landscape is more likely to enter a state of "gridlock".

However, this does not mean that political gridlock itself is a positive for the stock market. Capital Group's analysis of long-term historical data shows that regardless of whether there is a unified government, a divided Congress, or Congress controlled by the opposition party of the president, the S&P 500 has recorded double-digit average returns.

This data indicates that party control itself is difficult to explain the long-term trends of U.S. stocks.

The same political structure may correspond to completely different inflation, interest rates, corporate earnings, and economic cycles. For the market, what truly matters is not "who controls Congress", but whether the new political structure materially changes fiscal, regulatory, and growth expectations.

More Important than Elections are Interest Rates and Earnings

This is also the core market judgment of the original text.

Midterm elections can influence policy expectations, but they rarely determine an entire market cycle on their own.

For stock valuations, it ultimately comes back to a few more direct variables: whether corporate earnings can grow, what level the risk-free interest rate is at, whether the economy remains in expansion, and how high investors are willing to assign valuation multiples.

This is why the historical patterns of midterm elections need to be used cautiously.

Over the past few decades, the label "midterm election year" has covered completely different economic environments. In 2018, the market faced Federal Reserve rate hikes and tightening financial conditions, while in 2022, it dealt with high inflation and an aggressive tightening cycle. Even if the election timing is exactly the same, the macro environment in which the market operates may be entirely different.

Therefore, if a fourth-quarter rally occurs again this year, it cannot simply be attributed to the elections. A more reasonable explanation is that the decrease in election uncertainty may provide a marginal benefit, but whether the rally can be sustained still depends on whether the fundamentals can support it.

Key Variables to Watch for Year-End Market Continuation

From now until the end of the year, what is truly worth tracking is not a single election outcome, but three variables.

The first is interest rates.

If U.S. Treasury yields continue to rise rapidly, stock valuations will remain under pressure; if interest rate volatility decreases, the pressure on discount rates will ease, providing a better valuation environment for risk assets.

The second is corporate earnings.

Whether the post-election rally can be replicated in 2026 ultimately requires support from earnings growth. If earnings expectations continue to be revised upward, the market will find it easier to digest political and macro fluctuations; if the earnings cycle weakens, seasonal factors alone will struggle to sustain the rally.

The third is whether policies truly change cash flow expectations.

The significance of election results in the market is not because of the party labels themselves, but because they may change tax policies, fiscal spending, trade policies, regulations, and debt ceiling negotiations, thereby further impacting corporate profits, inflation, and interest rates.

This is the framework that historical data on midterm elections truly provides: before the elections, the market trades uncertainty; after the elections, the market re-prices the fundamentals.

Whether this year will replicate the past fourth-quarter rally ultimately depends not on who wins on November 3, but on whether interest rates, earnings, and economic data can continue to support current asset prices after the elections.