Is the S&P 500 Headed for a Correction Ahead of the Midterm Elections? Here's What History Says Will Happen Before November, and What Comes Next.

There's a growing amount of political and economic uncertainty in 2026. The ongoing conflict in Iran is only the latest factor to affect the stock market. It's exacerbating stubborn inflation, while many remain worried about how the jobs market will hold up and whether tariffs are actually here to stay or not.

In other words, there's a lot riding on the midterm elections in November -- and that might include your portfolio.

While we came close to a full-on correction in the S&P 500 (SNPINDEX: ^GSPC) in the first quarter, the benchmark index narrowly avoided officially falling 10% from its high. The Nasdaq Composite Index (NASDAQINDEX: ^IXIC) and Dow Jones Industrial Average (DJINDICES: ^DJI) both dipped their toes into correction territory before quickly bouncing back higher. But investors aren't out of the woods yet. Here's what's happened to the S&P 500 in previous midterm election years, and what history says happens once a new Congress starts its session.

The U.S. Capitol building. Image source: Getty Images.

Are we headed for a correction?

Midterm elections can have a very meaningful effect on markets. Congress is responsible for drafting and adopting important legislation that can have far-reaching effects on businesses and investors.

But the run-up to a midterm election can be filled with uncertainty, and investors dislike uncertainty. Stock prices are based on expectations for the future. The less confidence investors have in their outlooks, the greater the margin of safety they require to reduce the risk of being wrong about a company or the economic environment. So, it makes sense that many investors might shift from riskier assets like stocks to less risky assets like bonds or cash ahead of an election.

The analysts at Neuberger Berman took a look at the S&P 500's performance over the last 72 years of midterm elections, excluding years when the U.S. was already in a recession. It found that the median peak-to-trough decline in those years was 15%. Three of the last four midterm election years resulted in corrections, including 2022, when the index fell into a bear market.

Importantly, the analysts found that all midterm market troughs occurred before the elections. That means if history repeats itself, investors won't have to wait around very long to see the market reach its bottom (if it hasn't already). But what comes next could be even more important for investors.

What happens after the market bottoms?

If a midterm election brings uncertainty, the opposite is true once the election is behind us. That might explain why the S&P 500 has historically seen a very strong rebound following the midterm election sell-off. The Neuberger Berman analysts found that the median increase in the index in the year following the midterm sell-off was 30%.

Four of the last five midterm election years saw the S&P 500 recover by more than 20% in a single year. Granted, that's measuring from the market bottom and going forward one year. So, investors should expect returns well above the average S&P 500 annual return.

But if you look at the combined results of the past five midterm elections, the median total return starting from the prior peak to one year after the market bottom is about 9.2%. That is to say, in normal economic environments, the market recovers very quickly, especially around midterm elections.

That should give investors confidence to invest into the current market downturn. While there's a lot of uncertainty in the geopolitical climate and its ultimate effect on the economy, the long-term results of the top U.S. companies in the S&P 500 have proven resilient across a range of political environments.

The analysts at Neuberger Berman point out that the underlying finances of S&P 500 companies remain very strong. As such, it expects a smaller-than-average decline in the market compared to the past. If we haven't already put in a bottom for the market in March, buying opportunities might not get much better anyway later in the year. So investors should buy with confidence that the market will bounce back swiftly.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.