The Midterms Are Over. History Says the Good Part Starts Now.

Editor’s Note: Earlier this year, I broke down midterm election cycle dynamics and what they mean for the stock market. With the midterms now behind us, it’s a good time to revisit that analysis, because history suggests the period following the vote has typically been one of the stronger stretches of the four-year cycle. The second chart, comparing this year’s S&P 500 performance to the typical year-two pattern, has been updated through the end of October: the index is up 10.7% year-to-date versus the typical 0.7% gain.

Year Two Weakness, Year Three Strength: A 70‑Year Pattern

• Year Two of the presidential cycle is the weakest for the S&P 500.

• The market tends to trough mid-year before a sharp fourth-quarter rally.

• Year Three tends to see strong outperformance.

The market is behaving exactly as history says it should, even if it doesn’t feel like it…

In case you haven’t noticed, the midterm election cycle is getting underway. The early signs are already spilling into the market narrative. Campaign messaging is ramping up, policy trial balloons are being floated, and the headlines have taken on that familiar edge of political theater. The uncertainty associated is exactly why the second year of a presidential term has earned its reputation as the most volatile of the four‑year cycle.

You see, the stock market doesn’t respond well to ambiguity, and midterm years are full of it. Institutional investors tend to sell first and ask questions later. The data shows the S&P 500 almost always stumbles early, bottoms mid‑year, and then claws its way back as the political picture sharpens. Going back to 1950, Year Two consistently delivered the weakest returns, with an average gain of just 4.6%…

But that’s only part of the story. As the table above makes clear, the outlook improves dramatically once we cross into Year Three. Once the midterm results are known and the policy trajectory becomes clearer, uncertainty fades and positioning resets. Investors don’t need perfection, they just need direction. And Year Three reliably provides it.

Based on what we’ve seen so far, this year is tracking to script. The market is off to a choppy start, bouncing between gains and losses. And with what looks like a heated midterm run ahead, the volatility isn’t disappearing in the near term. But the data is unambiguous: as the summer approaches and the election outcome begins to take shape, the environment typically stabilizes. That clarity has historically fueled a strong fourth‑quarter acceleration and a constructive setup heading into the following year. If history is any guide, the S&P 500 should find its footing as the political fog lifts, leading to a steady rally.

But don’t take my word for it, let’s look at what the data’s telling us…

When we break down the second year of the presidential cycle, the pattern is remarkably consistent. The S&P 500 tends to struggle early, often posting its weakest returns of the entire four‑year cycle. That outcome isn’t random. Midterm years are full of unresolved questions: who will control Congress, what policy agenda will survive, and how aggressively the administration will pivot to shore up support. Investors don’t like uncertainty, and the data shows it.

We can see this clearly in the month‑by‑month data. When we normalize each cycle to the same baseline, the average Year‑Two path shows a familiar pattern: a choppy first quarter, a soft spring, and a mid‑year trough that often coincides with peak political noise. Once the primary season ends and the contours of the midterm outcome begin to appear, investor conviction rises and the stock market starts to recover. By the fourth quarter, the S&P 500 typically regains its footing because uncertainty finally begins to fade…

But the real inflection point comes in Year Three, and the contrast is striking. Once the midterm results are known, the policy trajectory becomes clearer. Investors transition from reacting to uncertainty to anticipating the next phase of the cycle. Historically, Year Three is the strongest of the four, with an average annual price gain of 17.2%. That dwarfs the other years and far exceeds the S&P 500’s lifetime average of 9.5% on a total‑return basis (dividends reinvested).

Bottom Line: While things may feel uncertain right now, this kind of turbulence is exactly what midterm years are known for. The headlines get louder, the narratives get darker, and markets chop as investors try to make sense of shifting political and economic signals.

But history is clear: these drawdowns are usually the setup, not the story. Once uncertainty begins to resolve and the election comes into focus, markets tend to stabilize, recover, and finish the year on firmer footing. If the past seven decades are any guide, the discomfort we’re feeling today is part of a well‑worn pattern that has repeatedly given way to stronger returns on the other side.

Five Stories Moving the Market:

Advanced Micro Devices, a key challenger to Nvidia Corp. in artificial intelligence chips, gave a sales forecast that soared past analysts’ projections, a sign of buoyant demand for data center processors; fourth-quarter revenue will be $17 billion, plus or minus 3%, exceeding the estimate for $16.3 billion – Bloomberg. (Why you should care - the upbeat guidance shows AI infrastructure spending is still accelerating, which supports earnings expectations across the semiconductor group and helps justify the tech-heavy leadership driving the broader market)

The U.S. has no immediate plans to strike Iran, according to President Donald Trump, as he played down speculation that he was preparing to escalate his conflict with the Islamic republic after the midterm elections – FT. (Why you should care - lower odds of near-term escalation reduce the risk of a supply shock in the Middle East, which could ease some of the geopolitical premium built into oil prices)

Iran is using everything in its arsenal to try to stop the flow of oil leaving the Strait of Hormuz, resorting to guerrilla tactics to shore up the regime’s fast-eroding position in the conflict and pile pressure on the Trump administration in deadlocked negotiations – WSJ. (Why you should care – Tehran’s weakening leverage could point toward a resolution, which would ease supply fears and take pressure off oil prices)

Super Micro Computer forecast revenue for the current quarter that exceeded analysts’ estimates and raised its annual sales outlook, signaling continued strength in demand for the company’s servers packed with artificial intelligence chips; revenue will be $19.5 billion to $21.5 billion in the three months ending in December, compared to the expectation for $16.5 billion – Bloomberg. (Why you should care - coming alongside AMD’s beat, it’s further evidence that AI spending is translating into real orders across the hardware supply chain, which supports the earnings case for the stocks leading this market)

New orders for U.S. factory goods increased more than expected in September, boosted by bookings for aircraft and a ​range of other goods, according to the Census Bureau; factory ‌orders rose 1.8%, exceeding the expectation for 1.2% growth – Reuters. (Why you should care - stronger-than-expected orders point to a manufacturing sector that’s holding up, which supports the economic growth backdrop for corporate earnings heading into year-end)

Economic Calendar:

Earnings: MCD, UBER, CVS, DDOG, EMR, GWW, COR, MLM, KHC, Q, CDW, FIS, ZBH, CRL, SWK, TRMB, PODD, QCOM, MCK, APP, MSI, DASH, EW, COHR, TKO, EXPE, ATO, CPAY, ES, TPL, STE, PTC, AMCR, CF, APA, HST, NWSA, FICO, ALB, TECH, MET, ALL, AFL, VMRK

Riksbank Monetary Policy Announcement (3:30 a.m.)

Eurozone - HCOB Services PMI for October (4 a.m.)

U.K. - S&P Global Services PMI for October (4:30 a.m.)

Eurozone - CPI (Preliminary) for October (5 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. - ADP Employment Change for October (8:15 a.m.)

ECB's Lane (Chief Economist) Speaks (8:20 a.m.)

U.S. - Trade Balance for September (8:30 a.m.)

U.S. - Treasury Quarterly Refunding Announcement (8:30 a.m.)

Canada - Trade Balance for September (8:30 a.m.)

U.S. - S&P Global Services PMI for October (9:45 a.m.)

U.S. - ISM Services PMI for October (10 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

Brazil - Central Bank Monetary Policy Announcement (4:30 p.m.)

BOJ - Minutes of September Monetary Policy Meeting (6:50 p.m.)

Australia - Trade Balance for September (7:30 p.m.)