Stock Market Faces a Worst-Case Scenario After Midterm Elections. History Says This Will Happen Next.

Midterm elections have historically been difficult for the political party in the White House, and this year was no different. Democrats won control of both chambers, flipping at least 42 House seats and seven Senate seats in a sweeping defeat for President Donald Trump's Republican Party.

Wall Street was initially pleased. The S&P 500 (SNPINDEX:^GSPC) and Nasdaq Composite (NASDAQINDEX:^IXIC) added 1.6% and 1.4%, respectively, on the day following the election, as investors celebrated the congressional gridlock that will limit Trump's ability to make major policy changes.

However, the indexes gave up those gains and more on Thursday, Nov. 5, due to concerns that a Democratic-controlled Congress could bring greater scrutiny to artificial intelligence infrastructure spending. Anxiety surrounding elevated oil prices, persistent inflation, and potential interest rate hikes added to the selling pressure.

Looking ahead, history says a worst-case scenario is about to unfold for the stock market.

Image source: Getty Images.

History says the stock market's gains will be much smaller in the remaining years of Trump's presidency

The S&P 500 has added 23% since President Trump returned to the White House for a second term in January 2025. That represents an annual return of 12.1%. But statistics suggest the benchmark index will deliver much worse returns throughout the remaining years of Trump's presidency.

There are six possible combinations of presidential party affiliation and congressional control. A Republican president could serve alongside a Republican-controlled Congress, a Democratic-controlled Congress, or a divided Congress. The same three possibilities exist under a Democratic president.

Of those six possibilities, the one produced by the latest midterm elections -- a Republican president paired with a Democratic-controlled Congress -- has historically been the worst combination for the S&P 500. The chart below provides details.

Data source: Carson Investment Research. The chart shows the S&P 500's annual return under different combinations of presidential party affiliation and congressional control. Data was collected between 1951 and 2025.

When a Republican president has served alongside a Democratic-controlled Congress, the S&P 500 has returned 4.9% annually, making it the worst combination for the stock market.

In other words, history says the S&P 500 will add 4.9% annually during the last two years of Trump's presidency. That equates to a total return of roughly 10%, which falls well short of the 23% return observed during the first two years of his second term.

We can also look at the data from another angle. Excluding the presidential variable, the S&P 500 has generally performed better under a divided Congress, returning an average of 15.1% annually compared with 8.1% annually when either party controls both chambers. Why? Wall Street favors predictability, and a divided Congress is much less likely to make sweeping legislative changes.

Of course, past performance is never a guarantee of future results. The chart above also indicates that the S&P 500 has gained 7.6% annually when a Republican president has served alongside a Republican-controlled Congress. But we have been in that situation for nearly two years and the S&P 500 has added 12.1% annually.

Why investors should not avoid the stock market

While the combination of a Republican president and a Democratic-controlled Congress has historically been bad news for the stock market, readers should bear in mind that the S&P 500 has still delivered positive returns under those conditions. So, it would not make sense to avoid the stock market solely because the midterm elections shifted the balance of power in Washington.

Additionally, the six-month period following midterm elections has historically been the strongest six months of the four-year presidential cycle. During that period, the S&P 500 and Nasdaq Composite have returned an average of 13% and 18%, respectively. And the explanation for those strong returns is simple: With midterm elections in the rearview mirror, there is much less political uncertainty.

Trevor Jennewine 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.