The S&P 500 is poised for significant volatility in 2026 as the midterm elections approach in November. After a robust performance in 2025, where the index surged by 16%, marking its third consecutive year of double-digit gains, Wall Street analysts are optimistic about further growth in the upcoming year, largely attributed to advancements in artificial intelligence (AI) stocks.
FactSet Research forecasts a consensus target for the S&P 500 at 8,255 for 2026, suggesting a potential growth of 21% from its December 2025 closing figures. While this optimistic outlook may entice investors to ramp up stock purchases, the political landscape in 2026 introduces an unpredictable element that could impact market momentum.
Historically, midterm elections introduce considerable uncertainty into capital markets. Despite recent trends of cooling inflation, robust GDP growth fueled by major tech companies advancing AI technologies, and potential interest rate cuts from the Federal Reserve, the outcomes of the elections remain uncertain, which may complicate the stock market’s trajectory.
Analyzing historical data provides insight into this volatility. Since 1957, there have been 17 midterm election cycles where the S&P 500 has entered a correction—defined as a decline of 10% or more—12 times. On average, the drawdown during midterm years is 17.5%, with these years often witnessing the most pronounced intra-year pullbacks compared to other presidential election cycles.
As the midterm elections draw nearer, heightened volatility is almost certain. Investors typically favor stable, predictable market conditions, and the uncertainties of election outcomes can create challenging circumstances.
During midterm election years, a common trend is that the incumbent party often experiences losses in both the House of Representatives and the Senate. While a divided Congress may imply further legislative gridlock, historical data suggests that this situation could provide a catalyst for market recovery from cycles of uncertainty. For instance, the S&P 500 has historically risen by an average of 8.8% in midterm years under a second-term president.
Additionally, research from Capital Group reveals that the average return of the S&P 500 one year following a midterm election is approximately 15.4%, which is nearly double the long-term average annual return of the index.
Though the near-term outlook may involve turbulence due to political uncertainties, remaining on the sidelines could result in significant opportunity costs for long-term investors. Smart investment strategies during this period may involve a couple of key considerations.
First, it would be prudent for investors to establish a healthy cash position. In times of pronounced volatility, chasing downward momentum can lead to value traps rather than advantageous purchases. Second, trimming exposure to speculative stocks while focusing on high-conviction positions can be beneficial. Sticking to blue chip stocks with resilient business models—capable of generating steady cash flow across various economic cycles—may serve investors well as they navigate the market ahead.
With 2026 looming, investors are advised to remain vigilant and strategically adjust their portfolios to weather the storm of midterm election volatility while preparing for potential market opportunities in the long term.
