How the the midterm elections could bring volatility to a stock market that's riding high into 2026
HS 30/12/2025
Wall Street is mostly bullish on the market’s performance for next year, but the midterm elections could throw a wrench into that positive outlook. The coming months already hold a number of other catalysts for turbulence, including a new Federal Reserve chair and an expected ruling from the Supreme Court on the legality of President Donald Trump’s tariffs . A partial U.S. government shutdown might also be in play, if disagreements between Democrats and Republicans in Congress around extending key Affordable Care Act (ACA) subsidies persist. Putting the 2026 elections into the mix could spur even more chaos for the market. “That’s just another factor that I think is going to add to potential volatilities in the markets, knowing how polarizing the political landscape is in this country,” said Eric Sterner, chief investment officer at Apollon Wealth Management. Historical underperformance In the four-year presidential cycle, midterm election years tend to be the most volatile for stocks, according to Aptus Capital Advisors, which found that the average intra-year decline for the S & P 500 is 19%. The other three years have an average intra-year drop of just 12%, while the average drawdown of all four years is 16%. “There’s going to be more volatility in emotions than in the market. Obviously, [Washington] has had a lot to navigate in 2025: tariffs, corporate and individual taxes, geopolitics,” David Wagner, the firm’s head of equities, told CNBC. “But we’ll start to see if there’s going to be some ramifications from these policies during midterm elections.” Wagner said that price returns in the first six months tend to be particularly weak in midterm election years because equity markets are “very good at pricing in higher growth before the growth actually hits.” It’s once growth actually hits and Treasury yields increase that markets often exhibit a “larger than average intra-year drawdown.” The market has favored more defensive areas of the market with this level of volatility, he added, noting that health care has had the best midterm-year track record compared to other sectors dating back roughly three decades. Two other top performers are consumer staples and utilities. While health care’s streak could be complicated by another government shutdown given its potential impact on the ACA marketplace, Wagner believes the broader market will ultimately be able to move past a stoppage. “Even in a midterm election year, the market should be able to shrug off the government shutdown, because this is a funding problem, not a debt ceiling problem,” Wagner said. “This is just a mechanism of trying to figure out what gets funded — an appropriation of funds — while a debt ceiling problem can come with an overall debt downgrade from a credit agency, and that’s what’s historically spooked markets.” The ‘sweet spot’ A lot of the pressure the market experiences during midterm election years takes place during the first three quarters of the year. That’s partly because of the uncertainty surrounding how the makeup of the Congress will change once the elections conclude, Ed Mills of Raymond James said to CNBC. But things could start to turn a corner for the market in the last quarter of 2026. “Usually around October of a midterm election year, that’s where, kind of, markets tend to reverse and start to turn positive and rally,” the Washington policy analyst said. This “sweet spot” of a four-year cycle — which goes from the fourth quarter of a midterm election year through the second quarter of the year after — should help lead the S & P 500 to finish 2026 between 8% and 12% higher, as forecast by Jeffrey Hirsch, editor-in-chief of the Stock Trader’s Almanac. .SPX YTD mountain S & P 500, year-to-date Hirsch’s projection calls for a fourth straight positive year for the S & P 500. The index is headed for a third year in the green, up more than 17% in 2025. It also advanced 24.2% and 23.3% in 2023 and 2024, respectively. “I don’t think that [the artificial intelligence] boom is over just because the year turns,” he said. “We’re going to get a transition to a new Fed that could be positive, if it’s seamless and continues with the [easing] cycle that we’re in, which I suspect it will.” Hirsch also believes the market sell-off that took place on the heels of Trump’s “reciprocal” tariffs announcement in early April “kind of pulled the typical midterm election year weakness forward,” not to mention that this midterm election year will be the second with Trump as president. The market performs much better in second midterm years under the same president, and that’s especially true for second-term Republican presidents, the editor-in-chief emphasized. Notably, in all midterm years going back to 1949, the S & P 500 has averaged a rise of 4.6%. In the sixth year of a two-term presidency — or the second midterm year — the broad-based index averages a 12.4% jump. 2026 also happens to be the sixth year of the decade, and the S & P 500 has not finished down in those years since 1966, Hirsch said. “It’s going to be choppier this coming year,” he said in an interview. “There’s not going to be as much massive upside. There’s going to be a bit more consolidation versus weakness.” “But 8% to 12% is still pretty dang good,” he added.
