Midterms and the stock market: What has history taught us?

Keytrade Bank

keytradebank.be

October 29, 2026

3 minutes to read

Since 1950, the US stock market has been up in the year following the midterms nineteen times in a row. But how is the stock market performing before and after these elections? And which sectors could be the winners or losers if power were to shift in Washington?

Americans will not elect a new president on 3 November. Instead, they will elect a new Congress and welcome in a new parliament. These elections will take place halfway through the president's term, hence the name 'midterms'. All 435 seats in the House of Representatives are at stake, as are 35 of the 100 seats in the Senate.

And while it may seem like a domestic issue, Congress holds a lot of power – voting on legislation and the budget and deciding how much the government can borrow. What's more, the Senate also approves major appointments, from ministers and judges to chairs of the US central bank. Those who control Congress therefore have a say in how much leeway the president gets over the next two years.

Today, the Republicans hold a slender majority in both chambers. In the House, they hold 218 seats, compared to 214 for the Democrats (source), while the Republicans hold 53 in the Senate compared to 47 for the Democrats – if you count the two independent senators who side with the Democratic Party (source). The Democrats must gain four seats in each chamber to obtain a majority.

The midterm report

The midterms are rarely a reason to celebrate for the president's party. Indeed, it has lost an average of 27 seats in the House in 20 of the 23 midterms since 1934. The only times the president's party won seats in the House were in 1934, 1998 and 2002 (source), while they have lost ground in the Senate in around two in three cases (source).

Voters like to use the midterm elections to assess policy, and they mainly look at their wallets when doing so. Since 1978, the president’s party has lost an average of 32 seats in the House whenever petrol prices have risen in the run-up to an election. When that price has fallen, the loss has been limited to six seats on average (source). Today, Americans are also feeling the pinch at the pumps. In September, inflation rose more than expected to 3.7%, primarily due to higher fuel prices, while wages barely went up (source).

This year, the polls are indicating voters are adopting a more critical approach – and not only towards the president. According to RealClearPolling, only 38.2% of Americans view President Trump in a favourable light. The Democrat and Republican parties are also both polling below 40%, at 39.7% and 37%, respectively. However, when the electorate is faced with choosing which party they want in Congress, the difference is starker, with the Democrats currently holding a lead of more than eight percentage points (source).

Although this is interesting for political scientists, it raises another, more important question for investors – how does the stock market behave before and after the midterm elections?

Nerves at first, often followed by recovery

Historically, years in which the midterms take place have not had the best reputation on the stock market. Since 1931, the S&P 500 has returned 4.7% on average in midterm years, compared to 9.5% in other years. The markets also appear to be increasingly nervous. Since 1970, median volatility in midterm years has stood at close to 16%, compared to 13% in other years (source).

But here the story takes a more surprising turn. Since 1950, the S&P 500 has risen by an average of 15.4% in the 12 months following the midterms. This is almost double the number observed during comparable periods in other years. The index has never been lower a year after the elections during any midterm cycle (source).

Is that a straightforward recipe for the stock market? Sadly, no.

The stock market isn't a fan of question marks

One possible explanation for the pattern is remarkably simple – uncertainty. Proposals on taxation, energy, healthcare, trade policy and regulation circulate in the media in the run-up to the elections. Companies don't know what will actually happen – and neither do investors.

Shortly after the elections, however, at least one unknown disappears, as the markets can see which laws may stand a chance, which plans may struggle and where political blockades may crop up.

Historically, weaker performance during midterm years is more strongly linked to uncertainty surrounding policies than to Wall Street's preference for one particular party or the other (source). That explains why simply reducing the stock market to Republican red versus Democratic blue is a dangerous game.

So, what can be changed?

Much of the policies that are important to the financial markets today can also continue in place without new legislation, such as import tariffs, immigration, deregulation and foreign policy. These are handled, for the most part, through the White House and federal government services. The US bank Morgan Stanley therefore expects that even a strong shift in Congress will not necessarily result in a complete change of direction when it comes to major policy (source). Congress does, however, have a significant influence on taxation, budgets, government spending and oversight, and this is where the differences may become more apparent.

Energy, banking and AI may come to the fore if Republicans maintain control

If the Republicans control both chambers, the White House will have more room to push forward with their agenda.

According to the US bank BNY, defence, fossil fuels, financial assets, cryptocurrencies and AI infrastructure are some of the sectors that could receive a strong boost. Nuclear energy and gas power plants may also benefit from the huge power demand created by data centres. Renewables and certain forms of spending in healthcare, on the other hand, could face stronger headwinds (source).

Yet more policy headroom can also come with a less pleasant side effect: larger deficits. If tax cuts and additional spending continue to increase the government debt, Washington will have no choice but to issue more bonds. Doing so may push up long-term interest rates and put pressure on expensive shares.

A divided Washington means fewer laws and more budget disputes

An old saying on Wall Street suggests that investors love a political stalemate. If neither party has complete control, there will be few far-reaching laws, and therefore few surprises. The numbers appear to back that up, too.

Under a Republican president with a divided Congress, the S&P 500 rose by around 23% on average in the year following the midterms. Where the president lost both chambers, that fell to 15% on average (source). Nevertheless, the bank is warning investors that they shouldn't simply assume that a divided Washington automatically means good news for the stock markets.

The flip side is that budget negotiations will be tougher. Shutdowns, where public services are suspended temporarily due to a lack of budget agreement, and discussions about the debt ceiling – the statutory upper limit for public debt – remain an ever-present risk even after the midterms. No matter which party wins, the US budgetary stance is unlikely to change dramatically – and the starting point already makes for uncomfortable reading. The Congressional Budget Office expects a budget deficit of USD 1.9 trillion, or 5.8% of GDP, in 2026, while debt held by the public will rise from 101% of GDP today to 120% in 2036 (source).For investors, this debt dynamic may ultimately prove to be more important than one election night.

Democratic control may mean greater supervision

If the Democrats gain more power in Congress, it will be harder to get new, far-reaching laws voted through.

At the same time, supervision of certain sectors may increase, such as large technology companies and energy producers according to Morgan Stanley. Competition, data privacy, AI, energy prices and fossil fuels may also be higher on the political agenda (source).

BNY, on the other hand, sees potential headwinds for renewable energy and areas of healthcare, such as hospitals and companies benefiting from public care programs. Pharmaceutical companies may then feel more pressure on drug prices (source).

Here, too, a majority in Congress is no guarantee, as the president still holds a right of veto.

What should you remember as an investor?

History tells us that the midterm years are more turbulent on average, and the 12 months following the midterm elections are remarkably strong. But that doesn't mean this scenario will be the case this time around. History shows us patterns rather than guarantees.

For investors, it is therefore particularly important not to read too much into one election result. The make-up of Congress may boost certain sectors or restrict others on a temporary basis, but interest rates, inflation, economic growth and corporate earnings remain just as important, if not more so.

And perhaps this is the most important lesson from previous midterms is that the markets react not only to who wins, but above all to how much uncertainty disappears afterwards. As soon as investors are better able to assess which policies are feasible, the focus shifts back to the economy and the companies themselves.

Those who invest for the long term don't need to turn their portfolio upside down on 3 November. However, it may be useful to check whether you have sufficient diversification and are not too reliant on one sector, region or political scenario.

Before investing, be sure to read up on the main characteristics and risks of financial instruments.