How do markets perform post-midterms?

Midterm elections are less than a month away, and given equity markets are already up over 10% year-to-date, investors are asking whether the strong performance continues post-election. While history may not repeat itself, the data is encouraging. Going back to 1950, the S&P 500 has delivered positive returns in the 12 months following every midterm election, with an average gain of about 15%. Near-term performance is also strong with the fourth quarter return in midterm election years averaging 6.6%.

While an impressive record, no statistic should be taken in isolation. Past midterm cycles have unfolded against very different economic backdrops, yet the overarching theme is apparent: markets don’t like uncertainty, and elections breed uncertainty. Thereafter, markets gain clarity on the political configuration going forward and refocus on the fundamentals and policies, which matter most for markets. Political calendars do not drive markets on their own, and investors should focus on today’s backdrop, which in our view supports a constructive outlook on risk assets:

1. Strong earnings growth: Analysts expect exceptional earnings growth of ~37% over the next 12 months. Robust earnings have allowed valuations to correct 15%, allowing for a more attractive entry point than at the start of the year.
2. A resilient economy: U.S. GDP is expected to grow by ~2% through 2027, a pace that supports corporate revenues and keeps recession risk contained.
3. A robust capex cycle: Business investment, led by spending on AI infrastructure, continues to provide a meaningful tailwind to growth and profits.
4. A less hawkish Fed than feared: We believe the Federal Reserve is likely to deliver less tightening than markets currently expect, which should provide some relief to the bond market and ease pressure on discount rates.
5. Depressed consumer sentiment: Somewhat counterintuitively, troughs in consumer sentiment have historically been bullish for stocks¹, as they often coincide with peak pessimism already reflected in prices. Today, sentiment is remarkably weak.

In short, history is on the side of investors after midterms, and an environment of solid earnings, steady growth, strong investment and a less aggressive Fed than feared gives us confidence this cycle can follow the pattern. Rather than trying to trade around the election, investors should stay invested, remain diversified and keep their focus on the longer-term drivers of returns.

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