History Shows: This Midterm Election Result Could Be a Warning Sign for the Stock Market

The midterm elections are happening in November, and investors are wondering whether a big change in government power in Washington, D.C., will have a significant impact on Wall Street. Most of the time, the answer is: probably not. Politics don't tend to have a big impact on long-term stock market returns.

Research from U.S. Bancorp in 2024 showed that most of the time, presidential and midterm elections don't matter much for the stock market. The bank's analysis found that S&P 500 index (SNPINDEX: ^GSPC) returns tend to be more affected by overall economic growth trends and inflation rates than by specific election results.

But history shows that one type of midterm election result can be bad news for stock prices. And it might be about to happen in November.

Let's look at what the 2026 midterm elections might mean for stock prices -- and how long-term investors should respond.

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Democrats are likely to make gains in the midterm elections

According to the FiftyPlusOne 2026 Congressional Forecast, based on the latest polls as of Sept. 20, Democrats have a 97% chance of winning control of the House of Representatives, and a 64% chance of winning control of the Senate. If this happens in November, the U.S. will have a divided government, with a Republican (President Trump) in the White House and one or more Democratic-controlled houses of Congress.

U.S. Bancorp's research shows that this is the only type of midterm election result that tends to lead to poor market returns. Historical data show that when a midterm election results in a Republican in the White House and full Democratic control of Congress, the S&P 500 tends to deliver 0.99% lower-than-average three-month returns compared to all historical periods.

Political history and stock market history don't always repeat. But based on this historical data, if current polling turns out to be on target and the Democrats sweep Congress in November, the S&P 500 could be at risk of a slight sell-off.

How to invest based on the midterm elections

Does this warning sign about the midterm elections mean you should change your investing approach? Not necessarily. For one thing, the lower S&P 500 returns after a divided-government election led to only about a 1% downturn over a three-month period. Long-term investors should be thinking much farther ahead than that.

U.S. Bancorp's analysis also found that in the year after midterm elections, the S&P 500 has consistently performed better than in non-midterm years -- no matter which party controls Congress. Perhaps there's a kind of post-election relief rally, where investors stop worrying about the uncertainty of an election and focus on the economy and stock market fundamentals.

Over the long run, the S&P 500 tends to go up, no matter who's in power in Washington. Ever since 1928, the S&P 500 has delivered annualized returns of about 10%, through presidents and Congresses of both parties and all combinations of unified or divided government. The Vanguard S&P 500 ETF (NYSEMKT: VOO) has delivered 15% annualized returns since September 2010 -- across four midterm elections and multiple presidencies.

If the Democrats sweep the midterms in November, the S&P 500 could rally. A Democratic Congress might take action to undo the policies driving "Trumpflation" and increasing Treasury bond yields. Other economic events could occur that would be bullish for stock prices.

Even if you are passionate about your political beliefs, try not to let politics affect how you invest. The stock market tends to move for reasons that have little to do with who won the latest election -- and it tends to deliver strong returns for long-term investors.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends U.S. Bancorp and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.