Impact of Midterm Elections on Stock Market Performance

Midterm elections in the United States have historically led to weaker stock market returns and increased volatility, although subsequent years often yield stronger returns. Investors typically experience heightened anxiety as policy uncertainty rises before an election, yet historical data suggests that market performance tends to rebound following the elections.

Data from the S&P 500 shows that since 1938, there is a 95% probability of stocks posting price gains in the 12 months after midterm elections. The average return during the second year of a presidential term is approximately 5%, with a notable increase to around 14% in the following year. This trend is attributed not to which party wins the elections, but to the reduction in policy uncertainty once the results are in.

Anu Gaggar, vice president of capital markets strategy at Fidelity, emphasizes that investors should focus on long-term strategies rather than reacting to election outcomes. "Vote in the booths, not in your portfolios," she advises, suggesting that investors avoid adjusting their positions based on election speculation.

Election years bring a surge of uncertainty, characterized by intense media coverage and speculation about future policies, leading to increased market volatility. However, core market drivers such as corporate earnings, capital spending, and broader economic conditions are typically more influential on stock performance.

Research shows that actual market returns can vary significantly during the first two years of a presidential term, with midterm years experiencing a range from declines of 27% to gains of nearly 40%. As of October 23, 2026, the S&P 500 had risen over 11% year-to-date.

Since 1950, midterm elections have shown a pattern of stocks generally rising in the subsequent year, linking to a decrease in uncertainty regarding tax and regulatory policies once the elections conclude. Analysts believe that a divided government resulting from midterms can also bring more stability, allowing investors to refocus on business fundamentals.

Heading into the 2026 midterms, investor sentiment is more cautious due to concerns over rising energy prices, inflation, AI spending, and interest rates. These factors have contributed to a spike in investor uncertainty, which is presently above long-term averages.

While some analysts predict increased volatility leading up to the elections, they advise against making hasty investment decisions based on short-term political developments. The consensus suggests that long-term performance is driven more by corporate growth and economic indicators rather than election outcomes.

Investors are encouraged to focus on various fundamentals, including strong projected earnings growth for the S&P 500, which is expected to exceed 29% for the third quarter of 2026. Fidelity's research indicates that corporate spending remains robust, particularly in AI, which could positively influence market performance beyond the implications of the midterms.

Ultimately, investors are reminded to avoid emotional reactions during election seasons, which can provoke unnecessary changes to well-planned financial strategies. Instead, they should concentrate on maintaining their objectives and adapting their portfolios to changing market fundamentals.