Can the Midterms Save the Stock Market? What Every Election Since 1946 Tells Us About 2026

[00:00:00] Speaker 1: Can the midterm elections turn this market around? On Tuesday, Americans vote, and the market is heading into it nervous. Chip stocks are down 27% from their June peak. The NASDAQ just had its worst month in a year and a half, and oil has doubled since December. So we did the homework. We pulled 80 years of daily S&P 500 data and lined up every midterm election since 1946, all 20 of them. Then we added the betting markets, the early voting numbers, a survey of about 300 market professionals, and what options traders are actually paying for. A few things jumped out. A year after a midterm, the S&P was higher 19 times out of 20. The three months right after the vote have averaged more than three times a normal quarter. There's one election result the market really isn't ready for, and it's probably not the one you'd guess. And the day options traders seem most worried about is not election day at all. It's the morning after NVIDIA reports. We'll walk through all of it and finish with three scenarios for Tuesday. First, a quick look at where we are. The S&P 500 closed Friday just under 7,600. That's only about 3% below its October record, and the index is still up almost 11% this year. Looking at the index alone, you wouldn't call this a crisis. But under the surface, it's a very different picture. The NASDAQ 100 is 9% below its peak. The chip index is down 27% from June, which is a bear market in the very stocks that led this whole run, and last week made it worse. On Friday, Intel lost almost 29% in a single day after a weak outlook. SanDisk fell 13%, Broadcom more than 5%, and NVIDIA 4%. Over Thursday and Friday together, the NASDAQ 100 dropped almost 5%. The big AI spenders raised their budgets again, and investors started asking who actually pays for all of it. On top of that, there's oil. In mid-December, Brent crude was around $59 a barrel. Today, it's about $118. The war with Iran has doubled the price of oil in 10 months. The Fed raised rates in September, its first hike since 2023, and the 10-year Treasury yield is sitting just under 5%. There's also a wave of new stock coming. SpaceX raised $75 billion in June, and Anthropic is lining up an IPO that could be even bigger. So that's the backdrop the midterms are walking into. Now, the election itself. Right now, Republicans control the White House, the House, and the Senate. All 435 House seats are up for grabs, and Democrats need a net gain of just 3 seats to take control. In the Senate, 35 seats are on the ballot, and 22 of them are held by Republicans. The chamber is 53 to 47 today, so Democrats need to pick up about 4. History leans in their favor. The President's party has lost House seats in 18 of the last 20 midterms. The betting markets agree. On polymarket, Democrats are around 95% to win the House and about 72% to win the Senate. And here's an interesting detail. Those odds have climbed almost in step with gasoline prices this year. Voters feel the war at the pump, and the odds have followed. Turnout is running hot, too. More than 48.5 million Americans have already voted, a new midterm record with days still to go. Registered Democrats lead the early ballots, 44% to 32%. That sounds like a landslide, but I'd be careful with it. Early voters have leaned Democratic for years, and the election day vote usually swings back toward Republicans. In Florida, Michigan, and Texas, there are signs Republicans are voting early again as well. There's also something a lot of people get wrong about prediction markets. When you see a race priced at 75% to 25%, it looks like a blowout. It isn't. That's the chance of winning, not the margin. This cycle, a candidate who's up about 5 points in the polls tends to trade at around 75%. For the Senate, most forecasting models give Democrats somewhere between a 62% and a 79% chance. So the House looks settled, but the Senate is still a real contest. In a few races, though, the polls and the money disagree. In South Carolina and Nebraska, polls show slim Republican leads, while the markets give those Republicans around a 70% chance. In the Nevada and Oregon governor races, it's the other way. The polls say toss-up, and the markets lean Democratic. Those are worth watching on Tuesday night. They'll tell us early whether the polls or the money had it right. So how much of this is already in prices? Quite a lot, it seems. UBS tracks a basket of 29 stocks that should do well under Republican policy. Defense, crypto, financials, and private prisons. That basket peaked in August, and it has slid back to around its lows for the year, while the S&P stayed near record highs. A blue wave is the consensus, and markets rarely pay you for the consensus. That sets up an interesting asymmetry. A Democratic House is almost a sure thing, so it can't really shock anyone. The real surprise would be Republicans holding on to either chamber. That's the result the market isn't ready for, and it would most likely send stocks higher, because it means less pressure for new AI rules and more of the same policy. What do investors themselves think? In an October survey of about 300 traders and portfolio managers, 55% said no result, and Congress would make them seriously consider selling U.S. stocks. When they were asked about the biggest risk to U.S. assets over the next year, foreign policy came out on top, meaning the war with Iran. More than half picked it. Congress wasn't even close. And that worry may have a date attached. The White House has hinted that a tougher line on Iran could come after the election. January Brent options already carry a premium for a price spike, and the futures curve keeps oil near $100 well into 2027. So the bigger risk in the weeks after Tuesday may come out of the Gulf, not out of Congress. Let's step back and look at the long history. If you take every year since 1946 and sort it by where it falls in a president's four-year term, the midterm year comes out as the weakest of the four. It averages under 4%, and the typical midterm year ends roughly flat. It's also the bumpiest. On average, the S&P falls 18% from peak to trough at some point during a midterm year. In the other three years, it's more like 11% to 13%. The year after, though, is the best one. The third year of a presidential term has averaged a 16% gain, and in 80 years it has only fallen twice, both times by less than 1%. This year hasn't followed that script. By the end of October, the average midterm year is flat. 2026 is up almost 11%. The midterm year slump did happen this time, but it showed up in chip stocks, software, and the AI trade. The index held up because a handful of giant companies kept carrying it. Now let's zoom in on the vote itself. For each of the 20 midterms, we measured the S&P 500 from the last close before election day, going back three months and forward up to a year. In the three months before the vote, the market has gone almost nowhere, up about 1.5% on average. After the vote, things changed. Three months later, the S&P was up 7% on average. Six months later, almost 13%. A year later, 14%. To put that in context, compare it with any random day since 1946. If you'd bought and held for three months, you'd have made about 2% on average. After a midterm, it's more than three times that. Over six months, it's close to three times. The hit rate is what really stands out. Three months after the vote, the S&P was higher 18 times out of 20. Six months and 12 months after, it was 19 out of 20. On an ordinary day, your odds of being up a year later are about 3 and 4. Here's what that looks like with every midterm since 1946 on one chart. Each line is one election, and they all start at zero on the last close before the vote. On the left is the three months going in. On the right is the year that followed. On the left, it's a tangle. Some years go up, some go down, and there's no clear direction. On the right, the lines fan out, and the fan opens upward. The amber line is the average. It's flat going into the vote, and then it climbs steadily for a full year. There were two years where it didn't work, at least not right away. In 2002, the dot-com bear market was still going, and the U.S. was heading toward the Iraq War. Three months after the vote, stocks were 8% lower. In 2018, the Fed kept raising rates into Christmas, and the S&P fell almost 15% by late December. But even in those two years, the market was higher a year later, up 15% after 2002, and 12% after 2018. Laid out as bars, you get 19 green bars, and one that's basically zero. That's 19.46, down a tenth of a percent. You'll often hear that stocks rally hard off the midterm year low, so we checked that too. From the lowest close of each midterm year, the market went on to gain 34% on average at its best point over the following 12 months, and never less than 14%. This year, though, that number needs some care. The 2026 low came back in March, when the war first sent oil higher, and the S&P is already up 19.5% from there. So a good part of the usual rebound has already happened. So why does this keep happening? It's not because one party is good for stocks, and the other is bad. After midterms under Republican presidents, the S&P averaged 15% over the following year. Under Democratic presidents, 13%. It's mostly about uncertainty. Before the vote, nobody knows who will be writing tax law, passing spending bills, or confirming the next Fed governor, so investors hold back. Once the result is in, the market can map out what's possible and what isn't, and that discount for not knowing starts to fade. Good news or bad, the market can finally stop guessing. Gridlock helps as well. A divided government usually means fewer big surprises from Washington, and a Congress that can't pass much is one investors can plan around. And then there's the calendar. The year after a midterm is the run-up to a presidential election. Every White House wants a strong economy going into that, and it tends to show up in policy. Of course, none of this is a law of physics. It's 20 elections, and each one came with its own Fed, its own recession, or its own war. But when nearly every one of them points the same way a year later, that's hard to ignore. So let's bring it back to Tuesday. If you combine the House and Senate odds, you get roughly a 70% chance of a Democratic sweep, about a 1 in 4 chance of a split Congress, and around 1 in 20 that Republicans keep both chambers. We're not taking sides here. Each outcome just matters for different parts of the market. Let's start with what history says about the most likely case. Seven times since 1946, one party held the White House and both chambers going into a midterm, and then lost at least one of them. A year later, the S&P was up 13% on average, and it was higher in six of the seven. The one exception was 1946, the flat year. And in the four years when a party lost both chambers at once, the market was up 16% a year later. The first scenario is a Democratic sweep. Since it's the base case, a lot of it should already be priced in. Still, expect some noise. There will likely be hearings on AI, on data center power bills, and investigations. NVIDIA and Amazon have already received inquiries from Democrats. Companies the government holds stakes in, like Intel and MP Materials, may face questions as well. Drone makers like Aerovironment and Kratos have been among this year's biggest losers, on fears of tighter defense budgets. Crypto names like Coinbase and Circle would lose hope of new legislation. There would be winners, too. Hospital groups like HCA and Tenet could benefit if Medicaid cuts get rolled back. And off-grid power suppliers like Bloom Energy and GE Vernova could gain if data centers are pushed to bring their own electricity. But remember, the president keeps the veto, and overriding it takes two-thirds of both chambers. Neither party will be anywhere near that. Where a Democratic Senate really matters is confirmations. Several seats on the Fed's board could turn over by 2028, so that's worth keeping an eye on. The second scenario is a split Congress, with Democrats taking the House and Republicans keeping the Senate. This is probably the one markets would like best. It means gridlock and a break on new deficit spending. I wouldn't expect a big bond rally, though. The deficit is running around 6% of the economy, which is rare outside a recession, so a stalemate only slows the borrowing down. The third scenario is Republicans holding both chambers. It's the long shot, and it would be the biggest surprise. Banks like Bank of America, Citi, and Wells Fargo would benefit from lighter regulation. Defense contractors like Lockheed, Northrop, and L3 Harris would benefit from bigger budgets. And AI policy would stay pretty much as it is. The catch is the deficit. This is the most expansionary outcome, and with the 10-year yield near 5%, long-term rates are where the pressure would show up. One more thing about Wednesday. Whatever the market does the day after the vote, don't read too much into it. Across 20 midterms, the next two weeks went the same way as that first day, only 55% of the time. That's basically a coin flip. Interestingly, the options market is looking somewhere else entirely. In VIX options, the biggest pile of open positions isn't around the election. It's the contract that expires on November 18th, the morning after NVIDIA reports, and it holds more than half of all VIX open interest. And there are about three calls, which are bets on volatility jumping, for every putt. On the S&P itself, protection against a deep drop got more expensive this month than ordinary hedges, and the gap hit its widest level in two years in mid-October. Many investors are positioned along the dollar and short bonds, with very little cover against a stock market shock. So the main worry isn't really who wins on Tuesday. It's whether the AI trade cracks again in the middle of the month. Of course, history doesn't trade at today's prices, so let's be honest about what's different this time. First, the Fed is hiking. That alone hasn't broken the pattern before. The Fed was raising rates around the midterms of 1994, 2018, and 2022, and the market was still higher a year later each time. But 2018 shows how rough the ride can get along the way. Second, valuations. The S&P trades at about 21 times next year's earnings. That's expensive by its own history, which leaves less room for disappointment. Third, oil and the war. A Middle East escalation after the vote is exactly the kind of shock that no chart can model. And finally, the starting point. Can a market that's already up 11% this year still get a post-election lift? We looked at the nine midterm years when the S&P was already up more than 5% going into the vote. Over the next 12 months, it gained another 13% on average, and it was higher every single time. Starting strong hasn't stopped the pattern. Before we wrap up, here's what's on the calendar because the election is only the first test this month. Apple and Palantir are due to report after the close on Monday. Tuesday is the vote, and AMD reports after the close that same day. Then comes the week of November 16th. Nvidia, now worth close to $5 trillion, reports after the close on Tuesday the 17th. VIX options expire the next morning. An Anthropics IPO is reportedly coming as soon as that week at a valuation that could approach $2 trillion. After a month when chip stocks fell apart, that week should tell us whether the AI trade is just correcting or whether something bigger has changed. So, can the midterm save the market? On their own, probably not. A vote won't bring oil down, it won't make the Fed less hawkish, and it won't settle the fight over who pays for AI. What it can do is take one big unknown off the table. And history is unusually one-sided about what tends to come next. Three months after a midterm, the market has been higher 90% of the time. A year later, 95% of the time. That's held under both parties, and no matter who won. So, if Wednesday gets messy, or if Iran headlines NOx stocks lower after the vote, 80 years of data say that has more often been a chance to buy than a warning sign. And a couple of weeks later, Nvidia reports, and the AI trade gets a vote of its own. We'll be watching both closely. See you after the results.