The Stock Market Usually Falls Hard in Midterm Election Years. Wall Street Says This Will Happen in 2026.

The S&P 500 (SNPINDEX: ^GSPC), the most popular benchmark for the U.S. stock market, has delivered double-digit returns in three consecutive years. Wall Street expects the index to extend its streak in 2026, but midterm election years typically involve sharp declines.

Here's what investors should know.

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The S&P 500 usually drops 18% at some point during midterm election years

The S&P 500 has consistently performed poorly during midterm election years since it was created in 1957. Here are two facts investors should know.

• The S&P 500 has returned an average of 1% during midterm election years, but the index has declined by an average of 7% during those years when a new president sits in the White House.
• The S&P 500 has suffered an average intra-year drawdown of 18% during midterm election years, meaning history says the index will drop 18% at some point in 2026.

What explains that trend? Midterm elections create uncertainty, especially because the political party in power tends to lose seats in Congress. Investors are unsure where to put money because they are unsure whether the president will retain enough congressional votes to maintain the status quo. Uncertainty is poison to the stock market.

However, policy uncertainty dissipates quickly after the midterm election results are finalized, and the stock market tends to deliver strong returns. In fact, Carson Research says the six-month period following a midterm election (i.e., November through April) is the strongest of the four-year presidential cycle. The S&P 500 has added an average of 14% in those six months.

Does that mean you should sell your stocks today and buy them back in November? Nope. Attempts to time the market often backfire. Famous fund manager Peter Lynch once said, "Far more money has been lost by investors trying to anticipate corrections, or trying to time the market, than has been lost in corrections themselves."

Indeed, the S&P 500 has done quite well during some midterm election years. The index's return has ranged from up 38% to down 30%, and its largest intra-year decline has ranged from 4% to 38%. Most Wall Street analysts expect 2026 to be one of the better midterm election years.

Wall Street expects the S&P 500 to increase 16% during the next year

Collectively, Wall Street analysts currently have more than 12,800 ratings on stocks in the S&P 500. FactSet Research blends the median forecast on every stock to determine the implied target level for the overall index. That number says the S&P 500 will reach 8,085 in the next year, which implies more than 16% upside from its current level of 6,940.

However, Wall Street has a spotty track record when predicting forward returns in the S&P 500. In fact, the median estimate in the last three years was off by an average of 14 percentage points, as detailed below:

• In 2023, the median estimate among 42 analysts put the S&P 500 at 4,200, but it finished 14% higher at 4,770.
• In 2024, the median estimate among 33 analysts put the S&P 500 at 4,700, but it finished 25% higher at 5,882.
• In 2025, the median estimate among 54 analysts put the S&P 500 at 6,500, but it finished 5% higher at 6,845.

Here's the big picture: Despite Wall Street's upbeat outlook, investors should be cautious in the current market environment. Midterm election years are notoriously volatile, and this year may be extra choppy because policy changes under President Trump, including tariffs, could be rolled back or undermined to some degree if Democrats win enough seats in Congress.

Limit stock purchases to your highest-conviction ideas, and (as always) only buy stocks you are willing to hold through a drawdown. Additionally, now is a good time to build a cash position in your portfolio. If the market tumbles into correction territory as the midterm elections approach, history says the dip will be a good buying opportunity.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FactSet Research Systems. The Motley Fool has a disclosure policy.