Midterms Could Spark Post-Election Rally — But History and Policy Risks Suggest Caution

Markets have often done what decades of data suggest after midterms: they rally once uncertainty clears. Historical patterns show gains in the months following elections as investors refocus on earnings and fundamentals.

In the 126 trading days — about six months — after a midterm election, the S&P 500 has gained an average of 14% since 1970, compared with an average 6% gain in non-midterm years, according to an analysis from BlackRock cited by Business Insider. Edward Jones data, cited by CBS News, puts the six-month average at 15.5%, with a 1.7% gain in the month immediately following the vote.

The standard explanation for those gains is straightforward: once an election is over, political uncertainty recedes and investors refocus on corporate earnings and economic fundamentals.

Volatility around the vote is possible, but markets have historically performed well in the year following midterms as political uncertainty recedes and attention returns to the economic outlook.— Magdalena Ocampo, market strategist, Principal Asset Management

Analysts had flagged before the vote that a so-called blue wave carried specific risks for certain sectors, particularly technology, financials, industrials, defense, and traditional energy, according to Morgan Stanley. Healthcare, consumer staples, and clean energy, by contrast, could see support from potential policy reversals under a Democratic Congress.

Hence, a blue wave could deliver a cold shower for stocks, though we would view a significant selloff as a buying opportunity given the remarkable strength of the economy and corporate earnings.— Ed Yardeni, president, Yardeni Research

The broader political picture also complicates the traditional 'gridlock is good' thesis. Divided government has historically been viewed as market-friendly because it limits Congress's ability to pass sweeping tax or spending legislation — reducing the risk of sudden policy shifts.

Less change makes a more predictable environment, which allows companies to invest in longer-term projects. That tends to be good for earnings.— Chris Low, chief economist, FHN Financial

Yet gridlock under a president who relies heavily on executive authority creates a different dynamic. Even with Democrats controlling Congress, the president's executive powers would remain largely intact — limiting Democrats' ability to restrain his agenda while also limiting their own legislative reach, given the president's veto power, according to UBS analysts cited by CBS News.

A Democratic Senate majority carries its own institutional consequences. According to Jaret Seiberg, a financial policy analyst and managing director at TD Cowen, Democrats could use that leverage to force the president to fill Democratic seats on independent agencies including the FDIC, SEC, and CFTC. A Democratic Senate would also elevate Sen. Elizabeth Warren of Massachusetts to chair the Senate Banking Committee, replacing South Carolina Republican Sen. Tim Scott — a shift Seiberg said would give Warren more latitude to advance populist financial legislation.

Fiscal risk is another variable that gridlock doesn't neutralize. The Bipartisan Policy Center estimates the U.S. will hit the debt limit again sometime between late winter and midsummer of 2027, at which point Congress will have to raise the ceiling, suspend it, or risk a government shutdown. Yardeni warned before the vote that prolonged standoffs could push Treasury yields higher, weighing on equity valuations.

Before the election, the setup for a post-midterm rally had looked unusually clean. From the start of the year through August, the S&P 500 recorded just four days of moves of at least 2% — a low-volatility signal that BlackRock said has historically been associated with a 19.4% calendar-year return in midterm years. Morgan Stanley, in a note to clients before the vote, predicted the S&P 500 would trough around 7,100 before finishing the year near 8,000 — a roughly 12% rally from its low.

Bottom line: We think the correction that began in June is now in its final stages, with much of the damage already done beneath the surface.— Mike Wilson, chief US equity strategist, Morgan Stanley

Whether any post-election moves represent the kind of dip Yardeni described as a buying opportunity — or the start of a more sustained repricing — remains an open question. Morgan Stanley's pre-election analysis noted that broader outlooks remain supported by resilient earnings and growth, even as near-term volatility persists.

Historically, gains following a Republican-president midterm have peaked around nine months after the election, according to Franklin Templeton Institute data cited by Business Insider. In those years, the tech sector has averaged a 31% one-year forward return — the strongest of any sector — followed by consumer discretionary at 17% and industrials at 13%.

Why it matters — The post-midterm selloff is a live stress test of Wall Street's most reliable seasonal trade, with trillions in market value at stake and a divided government now shaping policy over AI, financial regulation, and a looming 2027 debt-ceiling fight.

Reported by cbsnews.com, businessinsider.com, bloomberg.com, morganstanley.com