The months following the midterm elections have historically been the strongest for the stock market, with the S&P 500 gaining more than 10% on average, according to Wall Street forecasters.
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US stocks could be poised for a months-long double-digit rally following the midterm elections.
In midterm years with a Republican president, the S&P 500 has gained around 15% six months after the election.
JPMorgan and Morgan Stanley are among the banks eyeing a sharp spike in the near future.
The stock market may be on the verge of a post-election vibe shift.
Investors are nearing the end of what’s historically been the worst three-month stretch of the year for equities, and it may be about to give way to a much stronger period for the market, analysts say. It’s all thanks to the midterm elections , which in the past has acted as a “clearing event” for markets, with stocks often struggling beforehand, and then seeing strong gains once uncertainty is dispelled.
If history is a guide, it suggests the S&P 500 may be on track for a double-digit rally in the coming month, according to several Wall Street analysts.
In midterm election years since 1974, the S&P 500 has seen a median return of 0% from August 1st through the Election Day in November, strategists at Goldman Sachs said in a past report.
Yet, in the 126 trading days — about six months— after a midterm election, the S&P 500 has gained an average 14% since 1970. That compares to an average 6% gain in non-midterm years, according to an analysis from BlackRock.
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The gains may be even more pronounced, given that this year’s midterm elections are happening during a Republican presidency. Across all Republican-president midterms since 1954, the S&P 500 has gained an average 15% in the six months following the midterms, Chris Galipeau, the head market strategist at Franklin Templeton Institute, said. Historically, gains have peaked around nine months following the election.
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The tech sector has historically seen the strongest gains in the 12 months following a Republican president’s midterm year. In those years, the sector has seen an average 1-year forward return of 31%. That was followed by the consumer discretionary sector, which has seen average 1-year gains of 17%, and the industrials sector, which has seen gains of 13%, per Franklin Templeton’s analysis.
Top 5 sectors in a Republican president’s midterm year Average 1-year forward return
Information Technology 12.88%
Consumer Discretionary 17.02%
Industrials 13.48%
Communication Services 12.88%
Health Care 12.47%
Stocks have also been unusually strong and volatility has been subdued heading into the midterms this year, BlackRock said, a historically positive signal for stocks. From the start of the year through August, the S&P 500 has recorded just four days of moves of at least 2%.
“This has tended to bode well for returns: historically, midterm years with fewer than 10 of these big stock movement days have seen a 19.4% calendar year return,” the asset manager said.
Talk is building on Wall Street about a potential upswing for stocks, given how the market has struggled to move higher lately. While mega-cap tech companies have propped up the major indexes, market breadth has weakened considerably, with the majority of S&P 500 stocks falling more than 10% from their all-time highs, according to a recent analysis from The Kobeissi Letter.
In a note to clients this week, Morgan Stanley predicited a strong rally for stocks after markets dealt with a handful of “clearing events” for risk assets, including the midterms. The bank sees the S&P 500 hitting a trough of around 7,100 in the coming months before finishing the year at around 8,000, implying a 12% rally from its low.
“Bottom line: We think the correction that began in June is now in its final stages, with much of the damage already done beneath the surface,” Mike Wilson, the bank’s chief US equity strategist, wrote.
Hardika Singh, a strategist at Fundstrat Market Intelligence, said the post-midterm period was a “strong tailwind” for stocks.
“It’s right to be positioned for a sharp rally into November, using any weakness as an opportunity to add exposure,” she wrote.
Strategists at JPMorgan’s market intelligence team also floated a strong incoming month for stocks, assuming that Big Tech earnings go well. The market is waiting on results from Alphabet, Amazon, Microsoft, and Intel this week. Oracle is also hosting its Investor Day event on Wednesday, which is also expected to impact sentiment in the AI trade.
If most of the events are viewed in a bullish light by investors, it’ll likely generate “bullish momentum into the widely expected post-midterm positive seasonal period and year-end rally,” strategists wrote in a note.
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