Midterm Election Years Bring Peak Stock Volatility, but Analysts See Potential Buying Opportunities
The U.S. will hold midterm elections in November, a political event that typically introduces heightened volatility to equity markets. However, analysts note that this turbulence often creates compelling entry points for investors.
Jeff Buchbinder, Chief Equity Strategist at LPL Financial, noted that historical data shows midterm election years are traditionally the weakest of the four-year presidential cycle for stock performance.
The S&P 500 averages a gain of just 4.6% during these years, accompanied by the largest average drawdowns and elevated realized volatility.
Yet, he also pointed out that the 12 months following a midterm election historically deliver the strongest annual market gains, painting a robust outlook for investors.
Dating back to 1954, the S&P 500 has advanced in all 18 post-midterm 12-month periods, generating an average return of 18.2%.
Buchbinder emphasized that history suggests investors should focus on market mechanics rather than political forecasting.
This aligns with a familiar market dynamic: uncertainty peaks in the run-up to elections, only to dissipate once the results are finalized.
Tests and Opportunities
LPL Financial’s baseline expectation is for a divided Congress following this year's midterm elections, breaking the current unified political control.
A divided government, Buchbinder noted, typically leads investors to price in fewer major legislative changes, alongside heightened volatility surrounding key fiscal milestones like government funding and the debt ceiling.
However, increased clarity regarding the policy environment will eventually allow investors to refocus on fundamental drivers like economic growth, corporate earnings, and monetary policy.
He added that while midterm elections can test investor patience, discipline is rewarded.
Rather than attempting to predict election outcomes, investors are better served preparing for election-related volatility and staying ready to capitalize on opportunities as uncertainty subsides.
Analysis from Capital Group similarly highlights that midterm years historically experience choppy, sluggish market action in the first half, followed by stabilization and renewed capital inflows in the second half—though individual years can diverge from the norm.
Meanwhile, Morgan Stanley emphasized in a recent report that historical data demonstrates midterms have a limited lasting impact on financial markets.
The firm noted that focusing on actionable policy shifts and enduring thematic trends is far more effective.
Morgan Stanley does not expect the midterm elections to cause a material shift in U.S. policy direction or alter the broader macroeconomic landscape. Key policy drivers behind market performance—such as tariffs, geopolitical developments, and deregulation—are expected to persist regardless of the outcome.