US Midterm Elections: Key Things to Watch in the Stock Market

Every November, the United States holds its midterm elections, refreshing all House seats and roughly one-third of the Senate. On the surface this is a political event, but it has profound effects on US equities. For retail investors, understanding the relationship between these elections and the stock market can prevent unnecessary losses — and even capture long-term entry opportunities.

1. Midterm Election Years Tend to Underperform

The historical data is crystal clear. According to Capital Group, since 1931 the S&P 500 has averaged just 4.7% returns in midterm election years, exactly half of the 9.5% average for other years. BlackRock's figures are similar: midterm years average 7.5% versus 12.4% for non-midterm years.

Even more telling is Fisher Investments' research: in the 12 months before a midterm election, the S&P 500 has averaged a -0.7% return, compared with +8.1% during other periods. In other words, the year leading up to the election is the most common period for losing money. Many investors abandon their positions during the slow grind higher, only to miss the post-election rally.

2. Why Is the Pre-Election Period So Quiet?

There are three main reasons:

Policy Uncertainty: The government may change hands, tax rules may shift, and regulatory direction may pivot. Companies hesitate to make big decisions.

Fed on Hold: The Federal Reserve typically avoids large monetary policy moves in the months before a national election to avoid accusations of influencing the outcome, so liquidity conditions remain relatively static.

Sector Rotation Begins: Money rotates from growth stocks into value stocks, from tech into financials, healthcare, and other traditional defensive sectors. Capital waits for results before deploying aggressively.

3. How Election Results Move the Market

If the incumbent party loses the House or Senate, markets typically lean into the "divided government" narrative — meaning the president will struggle to pass new legislation, the status quo will hold, and businesses can keep operating. For stocks, this is actually good news because uncertainty falls.

If the incumbent party sweeps and retains full control of Congress, markets worry about policy going too far — higher taxes, heavier regulation — and sometimes sell off on a so-called "blue wave" or "red wave" scenario.

In terms of sectors, the rotation pattern around midterm elections is fairly consistent:

Winners: Defense, infrastructure, traditional energy, agriculture, tobacco (depending on who is in power)

Losers: Mega-cap tech, renewables, cryptocurrencies (tighter regulation likely)

Neutral: Consumer staples, healthcare, REITs (driven more by interest rates than elections)

4. The 6 to 12 Months After the Election Is the Best Buying Window

This is the most important number of all. According to Ameriprise, the S&P 500 has been higher 77.8% of the time one month after the election, 88.9% of the time three months after, and 100% of the time both six months and one year after (data going back to 1950). Sequoia Financial's research also points to a 16.3% average gain in the 12 months following the election.

Why? Because once results are known, all uncertainty evaporates. Companies can resume capital deployment, the Fed can return to normal interest rate decisions, and confidence rebounds quickly. This is precisely why the "Sell in May and go away" strategy works especially well in midterm years — it sidesteps the pre-election doldrums and re-enters after the November dust settles.

5. Real Risks Investors Should Watch

Elections matter, but they're not the only thing moving US stocks. In the 2026 environment, you also need to monitor:

Fed Stance: Chair Kevin Warsh has made it clear he is committed to the 2% inflation target and will not cut rates easily. Rates remaining at 3.50%–3.75% is a headwind for high-multiple tech stocks.

Index Concentration: The top 10 holdings of the S&P 500 ETF (SPY) already account for 37% of the fund, with the "Magnificent 7" alone at 32%. Buying SPY today is effectively a heavy bet on Nvidia, Apple, Microsoft and a handful of other megacap tech names. If the AI narrative cools, downside risk in SPY amplifies.

Abnormal Volatility: Schaeffer's Research notes that SPY implied volatility is only 13.5%, while single-stock IV averages 50% — the widest gap since 2016. This usually means index options are underpriced, creating a compelling long-volatility opportunity.

Geopolitics: US-Iran tensions, oil price swings, and chip restrictions can easily overshadow election effects. Don't make trading decisions based purely on the "election year" narrative.

6. Practical Deployment Suggestions

If You Already Hold US Stocks:

1. Consider trimming 20%–30% of positions in the 2–3 months before the election to lock in gains.
2. Keep your highest-conviction quality names as core holdings, then add on strength after the vote.
3. Use VIX calls or inverse ETFs like SQQQ as hedges, but mind the time decay.

If You're Mostly in Cash and Want to Enter:

1. Once November results are in line with expectations, scale into SPY or QQQ in three tranches.
2. December through January is typically the strongest window for US equities — consider adding on.
3. Avoid going all-in at once. Staggered entries reduce the risk of buying too high.

If You Like Sector Rotation:

1. From October onward, watch traditional defensive sectors like energy (XLE), financials (XLF), and consumer staples (XLP).
2. Tech (XLK) is better chased after the post-election setup clarifies.
3. Use sector ETFs rather than single names to diversify away policy-specific risk.

Conclusion

Midterm elections are not the end of the world, but they are an important window for adjusting portfolio positioning. History shows returns in election years tend to disappoint, but the year after is almost always positive. The safest approach is to play defense before the vote and re-engage aggressively afterward. Remember, the market is shaped by more than just elections — the Fed, corporate earnings, and geopolitics all matter in parallel.

Wishing you smooth and successful positioning through this pivotal 2026 season!