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Financial markets often experience anxiety leading up to midterm elections, but historical data shows the event typically heralds strong stock performance. Whether voters deliver a red or blue wave, a split decision, or maintain the status quo in Washington, the S&P 500 tends to recover and grow.
Historical S&P 500 Returns After Elections
According to an analysis of S&P 500 returns after elections from 1980 through 2024, the index rose an average of 0.2% after one day and one week, and 1.1% after one month across both presidential and midterm elections. A year later, the index gained an average of 13.7% after midterms and 13.8% after presidential elections, with returns remaining positive in 91% of cases. Furthermore, the S&P 500 increased after all 11 midterm elections from 1982 through 2022. While short-term returns proved less reliable, Ryan Detrick, chief market strategist at Carson Group, explained to US Top News and Analysis that market anxiety disappears once elections conclude and relief sets in.
Why Markets Favor Political Gridlock
The market generally prefers a divided government where one party controls the White House and the other holds at least one house of Congress. across 10 midterm and five presidential elections resulting in no single party holding power, the S&P 500 rose an average of 15% after one year, with positive returns in 14 out of 15 instances. By comparison, the index gained an average of 11.5% over the year following elections resulting in single-party control. Detrick noted that massive red or blue waves are disliked by markets due to excessive spending and concentrated power.
Scenarios where Democrats control Congress while a Republican holds the presidency have also proven positive. An analysis revealed that after three midterms in 1986, 1990, and 2006 featuring this dynamic, the S&P 500 averaged a 0.5% decline on the reaction day before rising 3.4% a month later and 10.9% after a year.
Broader Economic Factors Matter Most
Elections often coincide with broader economic factors that drive market performance more significantly. For instance, the S&P 500 dropped 22.1% in the year following the 2000 elections due to the dotcom bust, representing the worst post-election performance since 1980. Conversely, the best post-election year saw a 38.3% gain after the 2020 elections as markets rebounded from the COVID-induced selloff.
Société Générale emphasizes that Federal Reserve policy and the corporate earnings cycle ultimately matter more than elections. During the 2018 midterms, stocks declined as Democrats took control of the House during Donald Trump’s first term. More importantly, the Federal Reserve tightened monetary policy that year by raising interest rates four times, causing the S&P 500 to finish the year down 6.2%, though it still gained 11.7% a year after the election.
Current Market Risks and Catalysts
Current market swings heavily depend on artificial intelligence and whether tech declines will persist. Detrick stated that as long as the AI wave continues and the economy grows, the current bull market remains alive and well. However, a Democratic sweep of the House and Senate would likely pressure AI infrastructure development and trigger further retrenchment.
Additional pressures include a skittish bond market with globally rising yields, a mini debt crisis in France, and potential escalation in the war with Iran if Donald Trump pursues further strikes. Jim Reid, global head of macro and thematic research at Deutsche Bank, noted in a report that seasonality does not guarantee outcomes and worries surrounding Iran, AI, and France will not disappear.
History suggests the possibility of a Santa rally and S&P 500 gains following the midterms, though geopolitics, the Federal Reserve, bond markets, and artificial intelligence remain firmly in control.
