How midterm elections affect the stock market

Midterm elections can shape control of Congress, and election outcomes can influence what policy ideas move forward and which ones stall. Investors often notice that shift and wonder whether election outcomes reliably change market direction. This report looks at the pattern without assuming politics acts alone, because markets respond to many forces at once.

To test the relationship, U.S. Bank Asset Management Group Research reviewed Bloomberg market data spanning the past 125 years, covering 31 midterm elections. We used that history to compare how the S&P 500 performed before and after midterms, while acknowledging that past market performance is no guarantee of future results. By treating the election cycle as a repeating reference point – not a standalone cause – our analysis aims to separate what tends to rhyme from what truly drives returns.

What history shows before midterms

In the 12 months before midterm elections, the S&P 500 has historically delivered weaker results than its long run norm. Our analysis puts the average pre-midterm return at 2.9%, compared with a historical average of 8.9%. That gap helps explain why investors sometimes feel markets “drag” heading into midterm season, even when headlines focus on politics rather than fundamentals.

Even so, investors shouldn’t treat the midterm pattern as destiny or as a signal to time the market. Markets can price-in uncertainty well before ballots get counted, and policy expectations often shift repeatedly during campaign season. A more durable takeaway is that investors face a noisier information environment ahead of midterms, which can amplify day-to-day swings even when long-term trends remain intact.

What history shows after midterms

The post-midterm period tells a different story. Historically, the S&P 500 outperformed in the 12 months after midterm elections, posting an average return of 12.4%. In other words, markets have often looked past election uncertainty once the results settle and investors can refocus on growth, inflation, interest rates and earnings.

That stronger average does not mean every post-midterm year is a winner, and it does not imply a single “correct” portfolio move for all investors. Instead, it highlights a recurring rhythm: markets often struggle with uncertainty and improve once the fog clears – provided the economic backdrop cooperates. If your plan already matches your goals and risk tolerance, the data argues for discipline, not dramatic changes around election headlines.

It’s not midterm elections, it’s the economy

In reviewing midterm year-ahead returns, we found that outside forces explained the negative outcomes for 11 of the 31 midterm elections studied. Those factors included inflation spikes, interest rate hikes, the Great Depression and wars – events powerful enough to overwhelm any “election effect.” This evidence reinforces a practical point: the economy remains the primary engine driving market returns, while elections often shape the narrative more than the outcome.

We also tested whether the apparent pre- and post-midterm differences were statistically meaningful and not due to random chances. Using a T-test ¹ to compare midterm years with all other years, we found the difference was statistically insignificant, meaning the “midterms cause weak returns” conclusion doesn’t hold up reliably. We attribute this conclusion to two realities: the sample size is still modest at just 31 elections across 125 years of market data and returns vary widely – ranging from losses of more than 30% and gains nearing 50% – so averages can mislead when dispersion is high.

Keep the focus on fundamentals and your plan

Midterms can influence fiscal policy and investor sentiment, but fundamentals remain in the driver’s seat. Economic conditions – jobs, spending power, inflation, and interest rates – shape market direction more than which party holds the levers of power. Investors can still respect uncertainty by staying diversified, aligning risk with time horizon, and resisting the urge to make large tactical shifts based on headlines alone.

While it’s tempting to speculate which party or parties will control the House and Senate after any midterm elections, they shouldn’t have a significant impact on your investment portfolio or the investment strategy. Reach out to your wealth management professional if you have questions about your unique situation, and be sure to stay up to date on the latest market news  impacting investors.

This information represents the opinion of Wealth Management of U.S. Bank and U.S. Bancorp Investments. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their unique situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank or U.S. Bancorp Investments in any way.