The midterms and the market
The US equity market seems to like having midterm elections in the rearview mirror, but sometimes the market makes an exception for a hiking Fed.
Published: NOV 2, 2026
The S&P 500 has posted positive fourth-quarter returns in all but three midterm election years since 1934 (see chart below). The main hitch for those periods of negative returns was a Fed that raised rates.
Given this history, should investors now be worried? In September the central bank raised its benchmark by a quarter-point to a 3.75% to 4.00% range. All things being equal, fears of a post-midterms market slump could have merit.
Instead of joining the doomsayers, however, we would accentuate some positives. First, the central bank paused this month, meaning it may be less likely to raise rates from here and, second, a more restrictive monetary policy seems already priced in. Also, history appears to favor the optimist: equities have often rallied from the midterms into the first half of the following year, likely because the market hates uncertainty and most elections have a helpful habit of reducing that.
Yet the election can only decide so much – and even things that aren’t being voted on may make waves. The Iran war could potentially intensify, for instance. Equally, it could be that, post-election, the parties will be more receptive to a peace deal. And what of monetary policy? Chair Warsh denied that the upcoming midterms caused the Fed to pause last week, but that won’t be a consideration for the next FOMC in December. As for AI, would a Democratic Congress put the brakes on the data center buildout? That’s really more of a state and local issue, but even to the extent that it is a federal question it’s hard to see the government reversing course on a matter of such economic importance.
In general, as the chart suggests, equity markets do not play politics. It would be unwise, then, for investors to feel certain that the market shares their own perspective as to the relative merits of either of the two major parties. Perhaps that’s the main benefit of a chart like this. Some voters will be disappointed while others may be pleased. The disappointed should beware of thinking that all is forever lost; the victors should be careful not to let euphoria go to their heads. As T. S. Eliot once said, “There is no such thing as a Lost Cause because there is no such thing as a Gained Cause.”
Our outlook:
History gives some cause for optimism as to the fate of equities in the wake of midterms, but exceptions to the trend are real and painful, as in 2018. While the pattern may be mostly bullish, the main implication is simply to beware of emotion at a time like this. The forces that shape equity market performance are mostly outside of politics. The Fed’s pause at its October meeting is modestly encouraging, as it suggests the central bank does not think inflation will get out of hand. If so, a soft landing could lie ahead, potentially favoring disciplined equity strategies and, within fixed income, shorter duration.
- Sticky soft landing scenario — Inflation moderates gradually, growth slows but stays positive, and the labor market cools but remains healthy. Potential portfolio considerations: We believe diversified equities could work well, with a tilt toward large-cap quality and international names potentially benefiting from stable global growth; small caps may have less support without a stronger growth catalyst; emerging-market equities look attractive. In fixed income, short-duration strategies (roughly one- to three-years) allow a nimble stance without betting on rate-cut timing, and investment-grade credit is favored over high yield given moderate growth and contained spreads. In our view, emerging market debt can perform reasonably well if the US dollar stays range-bound.
- Inflation persistence scenario (stagflation lite) — Growth weakens while inflation remains sticky from energy costs, wages, tariffs, and geopolitics. Potential portfolio considerations: Historically, large-cap, quality stocks with pricing power tend to hold up better against margin pressure; value tends to outperform growth, and small caps may be more vulnerable to tightening conditions. Ultra-short and floating-rate fixed income reprices automatically if the Fed hikes, offering a potential hedge, while investment-grade credit may be preferable to high yield for its stronger balance sheets. Emerging market debt is likely to lag, as sticky inflation and a firmer dollar work against it.
Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
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