The S&P 500 typically underperforms in midterm election years, falling an average of 18% at some point before November.
After the midterm elections (as policy uncertainty dissipates), stocks typically perform well, returning an average of 14% over the next six months.
Wall Street consensus predicts that the S&P 500 will reach 8,085 by January 2027, which would represent an increase of more than 16% from the current level of 6,940.
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this S&P 500 Index(SNPINDEX:^GSPC)As the most popular benchmark for U.S. stocks, it has posted double-digit returns for three consecutive years. Wall Street expects the index to continue its streak into 2026, but midterm election years typically see sharp declines.
Here’s what investors should know.
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Since its creation in 1957, the S&P 500 has consistently underperformed in midterm election years. Investors should know the following two facts.
The S&P 500 returned an average of 1% in midterm election years, but in years when a new president was in the White House, the index fell an average of 7%.
The S&P 500 has fallen an average of 18% during the year in midterm election years, meaning history suggests the index will fall 18% at some point in 2026.
What explains this trend? Midterm elections bring uncertainty, especially since the party in power often loses seats in Congress. Investors are unsure where to put their money because they are unsure whether the president will retain enough congressional votes to maintain the status quo. Uncertainty is the poison of the stock market.
However, once midterm election results are confirmed, policy uncertainty quickly dissipates, and stocks tend to deliver strong returns. In fact, Carson Research says the six months after the midterm elections, from November to April, are the strongest in the four-year presidential cycle. The S&P 500 gained an average of 14% during the six months.
Does this mean you should sell your stock today and buy it back in November? No. Trying to time the market is often counterproductive. Famous fund manager Peter Lynch once said: “Investors lose far more money trying to predict corrections or trying to time the market than they lose in the correction itself.”
In fact, the S&P 500 has performed quite well in some midterm election years. The index’s returns ranged from a gain of 38% to a decline of 30%, with the largest drawdown during the year ranging from 4% to 38%. Most Wall Street analysts expect 2026 to be one of the better years for the midterm elections.
Overall, Wall Street analysts currently have more than 12,800 ratings on S&P 500 stocks. fact set research The median forecast for each stock is blended to determine the implied target level for the overall index. The figure suggests that the S&P 500 will reach 8,085 next year, which would represent an increase of more than 16% from the current level of 6,940.
However, Wall Street has a mixed record when it comes to forecasting forward S&P 500 returns. In fact, the median forecast over the past three years has been off by an average of 14 percentage points, as detailed below:
The average forecast among 42 analysts for the S&P 500 in 2023 was 4,200, but it ended up rising 14% to 4,770.
The average forecast of 33 analysts for the S&P 500 in 2024 was 4,700 points, but it ended up rising 25% to 5,882 points.
The average forecast among 54 analysts for the S&P 500 in 2025 was 6,500, but it ended up rising 5% to 6,845.
Here’s the big picture: Despite Wall Street’s positive outlook, investors should remain cautious in the current market environment. Midterm election years are notoriously volatile, and this year could be even more volatile as policy changes under President Trump, including tariffs, could be delayed or weakened to some extent if Democrats win enough seats in Congress.
Limit your stock purchases to your strongest ideas, and (as always) only buy stocks that you’re willing to hold on to during losses. Additionally, now is a good time to build a cash position in your portfolio. If the market falls into correction territory as the midterm elections approach, history suggests that this dip will be a great buying opportunity.
Before buying S&P 500 stocks, consider the following factors:
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has a position and recommendations in the FactSet research system. The Motley Fool has a disclosure policy.
Stocks typically fall sharply in midterm election years. Wall Street says this will happen in 2026. Originally posted by The Motley Fool
