Stocks Skipped the Midterm Blues. Will the Post-Election Rally Be Smaller?
On Tuesday, stocks experienced a rise, with the S&P 500 reaching a record high. Many investors are looking forward to potentially brighter days ahead, especially as the midterm elections are now behind us. However, those hoping for a typical post-midterm stock market boost might find that Wall Street has already seized part of the potential gains.
It’s quite understandable why many investors are optimistic about the future. The historical performance of the stock market after midterm elections is nothing short of encouraging. Since 1946, every midterm election has been followed by a positive return for the S&P 500, with the average gain sitting at around 14.4 percent. As November 3 approaches, that figure is definitely enticing when making predictions for the upcoming year.
However, there’s a significant caveat: the usual signs of weakness that typically precede these gains seem to be missing this time. Generally, midterm years have not been the strongest, according to BlackRock, which attributes an average annual stock market return of only 7.5 percent for those years, compared to 12.4 percent in more stable years. In previous cycles, election anxiety often came with a challenging summer, leading into a rally that began about a month prior to the election.
A study by U.S. Bank covering 31 midterm cycles from 1900 to 2025 reports an average return of 2.9 percent in the twelve months leading up to a midterm, contrasted with an 8.9 percent return across all years and 12.4 percent in the year following. Since 1980, the results have improved on both sides of the election—about 8.7 percent before and 17.5 percent after—but there remains a noticeable gap. Analysts at Fidelity also observed that, after World War II, the year before a midterm saw gains of about five percent, while the year following experienced roughly 14.5 percent increases.
These gains before the election often conceal what tends to be a rough summer. Longview Economics discovered an average drawdown from peak to trough of approximately 19 percent in the year preceding the election across 25 cycles since 1926. Most midterm years, even those not close to a recession, have witnessed a correction of over 10 percent, with some exceeding 20 percent, typically occurring during the summer months leading up to the election.
This year, however, it seems we just skipped over the usual summertime struggles. The S&P 500 has enjoyed a return of 12.7 percent, dividends included, through September. To compare, the average return for midterm-year during this period since 1950 was only 0.9 percent. BlackRock points out that trading has also been unusually subdued this year, with merely four days seeing movements of at least two percent in either direction through August—while in 2018 and 2022, those days numbered 20 and 46 respectively.
Why Does the Market Rally After Midterms?
A relief rally seems most effective when investors first face a situation requiring relief.
This is relevant because the reasons behind the strength following midterms largely hinge on the discomfort experienced beforehand. The prevailing theory suggests that uncertainty regarding congressional control leads investors to demand extra compensation for holding stocks, which drives prices down. As polling begins to clarify potential outcomes, prices typically rebound once that uncertainty dissipates.
A 2021 study in the Journal of Financial Economics supports this perspective, noting that elections alleviate uncertainty regardless of the political outcomes.
Yet, with the market appearing relatively strong and stable, we might not have as much of a reason to anticipate a significant release of anxious energy this time around. Although unexpected results in the elections could still impact stock prices, the typical sequence has seemingly skipped a critical phase.
Another simpler reason for post-midterm gains is that some of this well-discussed rally may actually be a rebound. Stocks that enter autumn after a harsh decline often have greater recovery potential. These subsequent profits get labeled as election-cycle returns even when factors like falling inflation, better earnings, or the conclusion of a bear market contribute significantly.
Historically, since 1950, when stocks were already performing well through September of a midterm year, the following fifteen months—from October of that year to December of the next—have yielded an average total return of 25.4 percent. Meanwhile, after weak starts, the average return has been 37.7 percent. Both of these figures indicate significant gains, but the more subdued starts tend to recover more dramatically. This timeframe stretches beyond the typical 14.4 percent figure, suggesting that a single average can sometimes obscure the distinction between purchasing after losses versus after gains.
The third reason relates to political motivations. It’s said that presidents tend to make tough decisions earlier on and then lean toward economic support as the next election draws near. This could provide a boost to stocks in year three, although actual policies and economic conditions ultimately matter more.
Maybe Markets Are Just Getting More Efficient
In theory, none of this should occur at all. Midterm elections always clear up pre-election uncertainty. Therefore, investors should account for this and adjust pricing accordingly without waiting for the election. Similarly, investors expecting a post-election boost should already factor this in ahead of time. The historical trend of post-election rallies might eventually lead to expectations that prevent such rallies from happening at all.
There’s also a possibility that reality is finally aligning with theory. We did see a decline this year, which took place early—from January 27 to March 30—where the S&P dropped about nine percent. This could have been investors selling off preemptively in anticipation of typical summer struggles. If that holds true, the current strength of the stock market might just be an early arrival of the usual post-election rally. The lack of volatility could imply that investors have accurately priced in the typical seasonal behaviors, ultimately nullifying their impact.
This doesn’t necessarily mean the end of the post-midterm winning streak. Following strong beginnings, stocks have still tended to rise over the next year. However, it does indicate that investors should differentiate between a history of positive returns and expectations of extraordinarily high ones. This year’s strength might have reduced the likelihood of a recovery while simultaneously raising doubts about the extent of any election-related relief.
Stocks can continue to rise driven by stronger profits and economic growth, but those waiting for a traditional post-election sigh of relief should consider just how little the market seems to be holding its breath.
