Worried About What the Midterm Elections Mean for the Stock Market? History Has a Clear and Reassuring Answer.
Key Points
Democrats claimed a resounding victory in the midterm elections.
Democrats are likely to impose more regulations and be more restrictive on data centers powering the artificial intelligence revolution.
Regardless of what happens next, long-term investors can look to history for some reassurance.
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The highly anticipated midterm elections have now come and gone, with the Democrats claiming a decisive victory that will see them reclaim control of both the U.S. House of Representatives and the Senate.
Plus, Democrats pulled off shocking wins in gubernatorial races in states like Texas and Georgia, where the party hadn't held those positions in decades. Since the midterms ended, the stock market has been extremely erratic, as investors try to understand what this means for the broader market and the artificial intelligence trade.
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What do the midterms mean for the market going forward? History has a clear and reassuring answer.
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The market should perform well, at least for the next 12 months
Analysts and investors have studied how stocks typically perform following midterm elections, and the answer is clear: stocks tend to perform well over the next 12 months.
According to JPMorgan Chase research, the broader benchmark S&P 500 (SNPINDEX: ^GSPC) Index has been positive in the 12 months following every midterm election since 1950. The average return is 15%.
Why do stocks typically do well after midterms?
"In short, history is on the side of investors after midterms, and an environment of solid earnings, steady growth, strong investment, and a less aggressive Fed than feared gives us confidence this cycle can follow the pattern," JPMorgan Chase Global Market Strategist Jordan Jackson wrote in a research note in early October. "Rather than trying to trade around the election, investors should stay invested, remain diversified and keep their focus on the longer-term drivers of returns."
Still, Jackson also noted that "no statistic should be taken in isolation," as past midterm cycles have occurred in extremely different economic environments.
Investors also typically prefer political gridlock in Congress, so there isn't any unexpected legislation that can suddenly throw the market for a loop. The Democrats may control Congress, but President Donald Trump still has veto power.
Additionally, the Democrats will have more leverage to potentially check Trump on some of his policies that many believe have negatively impacted the market, such as tariffs and the Iran war.
A Democratic Congress has thus far been difficult to analyze, but history still holds the key
Although there could be political gridlock in Congress, investors are still trying to figure out what will happen with data centers, which are key to the AI trade. Many Democrats won elections by advocating against them and in favor of stricter regulation.
Additionally, dozens of municipalities have approved data center moratoriums. Americans aren't exactly rolling out the red carpet for data centers, which can raise electricity costs.
Many Americans are also very negative about AI, which poses potential safety concerns and could replace many human jobs.
Some of the confusion showed in the two days following the midterm results. The Dow Jones Industrial Average rose 1,569 points on Nov. 4 and then fell 1,833 points on Nov. 5.
On the positive side, corporate earnings growth is still very strong.
If this trend continues, the market can certainly continue to move higher. After all, projected S&P 500 earnings growth in 2026 is nearly 33%, according to FactSet, and has powered the market through the Iran war, elevated inflation, and a more hawkish Federal Reserve.
Although history says stocks will rise significantly over the next 12 months, it's still too difficult a call to make, given broader uncertainty.
The good news is that history provides reassurance for long-term investors. If you invest in the broader stock market long term, it should go up. Sure, there will be difficult periods, but those all eventually end with the market rising.
Now, that doesn't mean you can buy any individual stock and it will be fine no matter what; quite the contrary.
But investors who have purchased the broader market or a highly diversified exchange-traded fund are typically rewarded long term. It's important to remember this, especially in times of volatility.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
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