Key takeaways

  • The 2026 US midterm elections take place on November 3.
  • Since 1946, the S&P 500 has risen in 17 of 20 years following a midterm (source, S&P Dow Jones Indices).
  • Q3 2026 earnings growth is expected to exceed 25% for a third straight quarter (FactSet, date).
  • Morgan Stanley sees the balance of power in Congress as more important for markets than which party wins.

When are the 2026 Midterms and What's at Stake?

The U.S. midterm election period is often accompanied by heightened uncertainty. However, history suggests that Wall Street tends to look beyond the noise. This has remained evident so far, despite the complex economic and geopolitical backdrop.

The Nasdaq Composite has gained 36.3% since the onset of geopolitical tensions and approximately 6% since concerns over U.S. Treasuries emerged on August 5.

So far, historical data suggest that markets have largely looked past the uncertainty surrounding the November vote and what its outcome could mean for the remainder of President Trump’s term. Two key factors help explain this resilience.

Historical Stock Market Performance During US Midterm Elections

Midterm election years are well known for periods of heightened market volatility. However, 2026 has been somewhat different. The market has experienced sharp corrections throughout the year, but it has maintained an overall upward trend and reached record highs, while the S&P 500 has remained broadly stable, in line with its typical seasonal pattern.

The more important story, however, is what happens after the midterm elections. In each of the past 20 midterm election cycles, the stock market generated positive returns over the following full year.

Historically, U.S. equities have performed well in the calendar year following midterm elections. Across 20 midterm cycles since 1946, the S&P 500 rose in the following year on 17 occasions, declined only once in 2015, by 0.7% and remained broadly flat twice, in 1947 and 2011.

The average return price during those years was 16.3%, while the median return was 18.1%. The strongest gains were recorded in 1995, at 34.1%, and in 1975, at 31.6%.

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Key Market Drivers and Sector Performance Ahead of Midterms

The main reason markets have remained relatively calm is corporate earnings. U.S. companies are going through an exceptional period of record profitability, particularly amid the artificial intelligence boom, which has had a significant impact on corporate earnings over the past two quarters.

According to FactSet data, the third quarter, which begins on October 13, is expected to mark the third consecutive quarter of earnings growth above 25%, as well as the eighth consecutive quarter of double-digit earnings growth of 10% or more.

Nevertheless, the broader picture is not without risks this time around. Inflation concerns remain, particularly amid persistently elevated oil and gas prices. At the same time, global bond markets are facing renewed pressure, with yields rising to their highest levels in decades.

Analysts believe these negative factors could weigh heavily on sectors tied to consumer spending and healthcare, which are particularly sensitive to potential policy changes following the elections.

How Could Different Election Outcomes Affect Markets?

Analysts Morgan Stanley believes that the composition of the congressional majority may matter more to equity markets than which party wins the election. The team expects seasonal factors to become increasingly supportive of markets starting this month, although uncertainty could still leave room for a near-term pullback if Democrats outperform expectations.

The bank has identified three potential scenarios:

Scenario 1: A Unified Democratic Majority

Under this scenario, Democrats could use must-pass legislation as leverage to delay cuts related to the Affordable Care Act under the OBBBA. Such a development could have negative implications for consumer and healthcare stocks.

Scenario 2: Unified Republican Control

This outcome could pave the way for the passage of a reconciliation bill along party lines. Morgan Stanley views this scenario as the most favorable for markets, with the potential to support further gains in equities.

Scenario 3: Divided Government

A divided government could result in less pressure related to supply-side factors and lower interest-rate volatility. However, it could also provide less support for the U.S. dollar while creating clearer downside risks for economic growth.

What About Interest Rates?

Morgan Stanley believes the elections themselves will not be the decisive factor in moving the yield curve. Instead, a fiscal deficit that exceeds investors’ expectations would be the factor most capable of driving a significant move in interest rates.

Post-Midterm Market Outlook: Historical Trends and Price Movement Patterns

Looking ahead, historical patterns remain encouraging. Markets have typically moved beyond the uncertainty surrounding midterm elections and rallied once the results become clear and political uncertainty begins to fade.

However, the current environment presents a more balanced picture. On one side are positive factors, including strong corporate earnings and the historical tendency for equities to generate positive returns following midterm elections. On the other are risks surrounding the global economy, particularly elevated energy prices and the potential for persistent inflation, as well as growing concerns across bond markets.

Conclusion

U.S. midterm elections often trigger short-term uncertainty and market volatility. However, the longer-term historical record tends to favor patient investors.

With corporate earnings remaining strong and historical patterns providing additional support, the market appears to be positioning for a potential post-midterm recovery. As always, past performance does not guarantee future results, underscoring the importance of disciplined risk management and close monitoring of economic indicators and developments across key market drivers—including interest rates, bonds, oil producers’ decisions, inflation, and the labor market.