Key Points
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2026 produced above-average S&P 500 returns for a midterm election year so far.
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The last 19 midterm elections have all led to a year of positive returns for investors.
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Investors should remain focused on key details outside of politics to find good investments right now.
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The 2026 midterm elections are officially behind us. The 120th Congress is set to convene on Jan. 3, 2027, with quite a few new representatives and senators.
The legislature can play a significant role in the stock market’s performance through laws that impact consumers, businesses, and investors. But there’s always some uncertainty about what a new Congress will be able to accomplish, especially in a divided government.
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So, many investors may be wondering how the stock market usually performs after midterm elections.
The market cycle and the election cycle
Investors don’t like uncertainty. The value of a stock is based on expectations for future earnings, but with greater uncertainty, there’s a broader range of potential outcomes. As a result, investors demand a larger margin of safety for stocks when uncertainty is higher.
The lead-up to a major political election like the midterms brings a lot of uncertainty. But once investors know the results of an election, they can create forecasts with much more confidence.
As a result, stock returns are typically lower in election years and higher in the off years. Since 1990, midterm election years have produced far weaker S&P 500 (SNPINDEX: ^GSPC) returns than any other year in the four-year election cycle, averaging just 2.8%.
That said, 2026 has seen the market hold up better than average. The S&P 500 was up more than 10% for the year heading into the election. Still, that’s not outside historical norms, as the average is weighed down by dismal market performance in 2002 and 2022.
That means the strong post-election performance we’ve seen throughout history could be poised to repeat itself. The S&P 500 has produced positive returns in 19 out of 19 of the 12-month post-midterm-election periods since 1950. The average return for the index during those periods is 15.1%. That’s well above the historical average returns for the S&P 500.
Will a new Congress usher in new market highs?
While Congress (and expectations for what the legislature will do) play a big role in the everyday lives of Americans and the prospects for American businesses, the biggest force impacting corporate profits is the economy itself. Steady GDP growth, low unemployment, stable prices and interest rates, and consumer spending will have a much bigger impact on stock prices than Congress.
Analysts at U.S. Bank stripped out a handful of outlier years in history when major economic shocks had an outsize negative impact on stock returns during midterm election years. They found that excluding those years from the average market returns in midterm election years since 1900 yielded returns that were very similar in the 12 months leading up to the election and the 12 months following it. That said, the analysts don’t account for positive economic surprises that may have led to outliers on the other side of the equation.
Investors are better off focusing on the fundamentals of specific companies, sectors, and the economy as a whole. Politics can certainly play a role in those, but it’s not the be-all and end-all in determining corporate profits and stock returns. Maintaining a steady passive investment approach and investing at regular intervals should produce solid results regardless of the election cycle. Those focused on individual stocks can always find opportunities in any market, regardless of who’s in charge of the legislature.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends U.S. Bancorp. The Motley Fool has a disclosure policy.
