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

Editor's Note: At the start of February, I walked through the dynamics of the midterm election cycle and what it means for the stock market. Today, I want to dig deeper into the data so we have a clearer sense of where we are in the cycle, and what history suggests we should expect from here.

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 rough 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:

Nvidia posted a 94% jump in profit and record fourth‑quarter revenue, easing recent fears of an AI‑bubble unwind; the chipmaker delivered net income of $43 billion, up from $22.1 billion a year earlier, on sales of $68.1 billion, a 73% increase that easily topped Wall Street expectations – WSJ. (Why you should care – gross margins of 75% were right in-line with consensus expectations, despite weeks of mounting speculation that the company would miss)

Salesforce expects revenue to grow in the current fiscal year at about the same rate as it did the year before, as investors worry about AI’s threat to software; the company said revenue will be about $46 billion in the fiscal year ending in January 2027, in-line with consensus expectations – Bloomberg. (Why you should care - CEO Marc Benioff reiterated a long‑term target of $63 billion by 2030, ahead of Wall Street’s $60 billion view)

Snowflake forecast fiscal 2027 product revenue above Wall Street’s estimates, as booming enterprise demand for artificial intelligence tools drives clients to the company's cloud-based data analytics platform – Reuters. (Why you should care - CEO Sridhar Ramaswamy said more than 2,500 customers have already adopted the company’s new Snowflake Intelligence agentic platform since its November launch)

Federal Reserve Vice Chair for Supervision Michelle Bowman warned that traditional lenders need more flexibility to compete as non‑bank financial firms keep expanding without comparable capital or liquidity standards - Bloomberg. (Why you should care — her comments point to a lighter regulatory touch for banks, which could free up more capital for lending)

Bank of Japan Governor Kazuo Ueda said the central bank will scrutinize data at its March and April meetings before deciding whether to raise interest rates, telling the Yomiuri that hikes will continue if Japan makes progress toward its economic and price goals – Reuters. (Why you should care – Japanese Prime Minister Sanae Takaichi recently nominated two BOJ board members who favor more stimulus, adding political nuance to the road ahead)

Economic Calendar:

Earnings: ADSK, BIDU, CRWV, DELL, EME, INTU, LNG, MNST, MTZ, PEG, RY, SATS, TD

Bank of Korea Monetary Policy Announcement

ECB’s Lagarde (President) Speaks (3:30 a.m.)

Eurozone – Private Sector Loans for January (4 a.m.)

Eurozone – Business Climate and Consumer Confidence for February (5 a.m.)

U.S. - Initial Jobless Claims (8:30 a.m.)

U.S. - Continuing Claims (8:30 a.m.)

Fed’s Bowman (Board Member, Voter) Speaks (10 a.m.)

U.S. – Kansas City Fed Manufacturing Index for February (11 a.m.)

Treasury Auctions $44 Billion in 7-Year Notes (1 p.m.)

Fed's Balance Sheet Update (4:30 p.m.)