The 2026 midterm election season has been a nail-biter. Republicans entered the contests with one of the slimmest margins of control of the House of Representatives in history and seem poised to lose power. The Senate is likely, but not certain, to stay red. But an awful lot can happen in the final weeks and days to turn the tide one way or the other.
One thing is much more predictable, however: The stock market almost always shakes off the uncertainty that leads up to a midterm election and performs well in the third year of a presidency.
Midterm years are choppy, with a bias to the downside. Since 1926, the U.S. stock market has delivered its weakest annual returns in midterm years, on average, rising just 7.5%, compared with an overall average annual return of 12.4%, according to data from BlackRock analysts Bryan Wood and Mark Peterson. The two most recent midterm years have been the two worst years for the S&P 500 Index since 2008: In 2022, stocks fell 18.1%; in 2018, they dropped 4.4%.
Three cheers for year three of a presidential cycle
By contrast, the S&P 500 hasn't lost money in the third year of a presidential term since 1939. We must note that past performance is no guarantee of anything. But we'll also note that in 2023 the pattern played out with an S&P 500 return of 26.3%.
Why is this post-midterm effect so powerful? Because financial markets hate uncertainty, and wrapping up the midterm elections typically reduces political and policy uncertainty — especially when the result is a divided Congress or a significant loss of seats for the president's party, making policy advancements harder to achieve. "Legislative gridlock reduces policy risk and supports additional equity upside, all else equal," says Barclays Capital public policy analyst Michael McLean.
McLean notes that since World War II, the president's party has lost seats in 18 of 20 midterm elections, with 1998 and 2002 the exceptions. The average loss was 25 seats. (The average job-approval rating for presidents was 50% in this period, a good 10 percentage points above President Trump's numbers in August.)
Currently, Republicans control the presidency and both houses of Congress. (The Supreme Court, although not partisan, has a majority that are conservative, Republican-appointed and business-friendly.) The Republican margin in the House sat at just three in August, the smallest majority in 92 years. The Democrats are widely expected to win enough seats to gain control of the chamber.
It's an uphill battle for Dems in the Senate, where Republicans have a 53-47 margin. Although Democrats need to gain just four seats, only 10 of the 35 races this year are competitive, McLean says, and Trump won seven of those 10 states in the 2024 presidential election.
Most election watchers who are modeling the intersection of politics and the markets are planning for a Democratic House and Republican Senate. That scenario, combined with a Republican president, has produced an average annual return in the S&P 500 of 13.7% since 1933, says Keith Lerner, the chief market strategist at Truist Advisory Services. That's the second-best mix for annual returns, behind a Democratic president, Democratic Senate and Republican House. A Republican president with a fully Democratic Congress, however, has produced just 4.9% average annual returns, the worst performance of any combination.
The analysts at LPL Financial say that although a split Congress means investors should expect fewer large legislative changes, they could see more volatility around key issues such as government funding and the debt ceiling. Democrats will likely use House committees to revisit changes the Trump administration made at the Consumer Financial Protection Bureau (CFPB) and to push for greater regulation of banks and prediction markets, LPL believes. Trump will continue to use executive orders and regulatory rulemaking to boost his agenda.
Congressional gridlock isn't guaranteed, however. BCA Research posits a 60% chance of Democrats pulling off an upset and winning the Senate. In that case, restoring the powers of the CFPB would likely graduate from a committee-hearing topic and become legislation that reaches the president's desk, awaiting signature or a veto.
Even in the event of a Democratic sweep — or, less probably, a continuation of Republican control — small majorities in either direction would be likely to limit the party in power's agenda to "more incremental and contested policy outcomes," predict LPL's analysts. And any vetoes by Trump would probably withstand override attempts.
So what's an investor to do when it comes to translating political moves into portfolio moves? You might guess that our advice is to stick to your long-term plan, but keep the following in mind:
1. Don't sit on your hands until the balloons drop
Waiting for post-election certainty could mean missing out. Those hefty third-year gains don't always wait for January 1. Historically, the market begins to rally about one month before midterm elections as polling data starts providing a clearer expectation of the outcome, according to Wood and Peterson, the BlackRock analysts.
Since 1970, the six-month periods immediately following a midterm election have produced an average return of 14.1%.
2. Be careful about handicapping post-election market winners
Many analysts suggest that post-midterm stock gains are broad and difficult to predict by industry. That doesn't stop investors from trying — several high-flying space stocks, for example, had terrible summers as investors figured rising Democratic fortunes meant less funding for the Defense Department, including space exploration.
But Truist's Lerner says that although conventional wisdom often suggests certain sectors should benefit from specific election outcomes, history shows things often unfold very differently than expected. Economic and business trends shape returns more than political headlines, he says.
An exception might be the technology sector, say the Barclays analysts. They note that tech stocks are perennial post-midterm winners because they are among the biggest beneficiaries of a drop in policy uncertainty, particularly with regard to trade and national security issues. Tech tops the sector leaderboard by a wide margin for 12-month post-midterm returns, according to Barclays, outperforming the S&P 500 in all but one midterm election cycle since 1990.
3. Don't obsess over politics
Keep in mind that the mitigation of U.S. political uncertainty is only one part of the risk equation for investors. Matt Gertken, the chief geopolitical strategist at BCA, says there is a tendency to lump all political and geopolitical risks together, from tariffs to the control of the Strait of Hormuz to the U.S. midterm elections to China's global ambitions.
To do so is "misleading," he says. "The midterm election pales in comparison to Hormuz or Taiwan risks."
4. Check your biases
What investors should not do, analysts say, is let their own political preferences prompt investment choices.
Wood and Peterson of BlackRock cite an extreme example to make a point: Since 2013, a $100,000 investment in the S&P 500 would have grown to $398,000 by the start of 2026 if left fully invested. But had investors moved to cash whenever their preferred political party lost the presidency, returns would have been dramatically lower — $214,000 if you pulled out with a Republican president or $186,000 if a Democrat prompted your exodus.
"Letting politics guide investment decisions comes at a significant cost," they say.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.