Markets are heading into the midterm elections with investors on edge, but historical data suggests the event has often been followed by solid performance for the S&P 500, regardless of whether elections produce a Republican victory, a Democratic victory, divided government or no change in Washington’s balance of power.
A CNBC analysis of S&P 500 returns after elections from 1980 through 2024 found that the index gained an average of 0.2% after one day and one week, and 1.1% after one month, across presidential and midterm elections. One year after midterm elections, the average gain was 13.7%, compared with 13.8% following presidential elections. Returns were positive in 91% of the cases examined, while the index rose after all 11 midterm elections held between 1982 and 2022.
Short-term performance has been less consistent, particularly after presidential elections, which produced slightly negative average returns after one day and one week. Ryan Detrick, chief market strategist at Carson Group and a CNBC contributor, said that markets often experience relief once the uncertainty surrounding the election has passed.
Historically, investors have tended to favor divided government, with one party controlling the White House and the other holding at least one chamber of Congress. Across 10 midterm and five presidential elections that produced divided control, the S&P 500 rose an average of 15% over the following year. Gains were recorded in 14 of those 15 cases. Elections that resulted in single-party control produced an average one-year gain of 11.5%.
A scenario in which Democrats control Congress while a Republican occupies the White House has also been positive historically. After the 1986, 1990 and 2006 midterms, when Democrats controlled both chambers and a Republican was president, the S&P 500 fell an average of 0.5% on the reaction day, but gained 3.4% after one month and 10.9% after one year.
Election results, however, may coincide with other forces that have a greater effect on markets. The S&P 500 fell 22.1% in the year after the 2000 election amid the dotcom bust, its worst post-election performance since 1980. Its strongest post-election year came after the 2020 election, when the index gained 38.3% during the recovery from the selloff caused by the COVID-19 pandemic.
Société Générale said Federal Reserve policy and the corporate earnings cycle ultimately matter more than election outcomes. Following the 2018 midterms, for example, stocks declined even though Democrats won control of the House. The Federal Reserve raised interest rates four times that year, and the S&P 500 ended 2018 down 6.2%. A year after the election, however, the index was up 11.7%.
Artificial intelligence is another major variable for the current market. Detrick said the bull market could remain intact if the AI expansion continues and the economy keeps growing, but a Democratic takeover of both the House and Senate could put pressure on AI infrastructure investment and trigger further retrenchment in technology stocks.
Investors are also watching rising global bond yields, financial stress in France and the potential for an escalation in the war with Iran. Jim Reid, Deutsche Bank’s global head of macro and thematic research, cautioned that seasonal patterns are not guaranteed to determine market performance and that these risks will not disappear after the election.
Historical trends could support a year-end rally and further S&P 500 gains after the midterms, but the market remains heavily influenced by artificial intelligence, geopolitics, Federal Reserve decisions and bond-market conditions.
Sources: CNBC Markets.