US midterm elections: one of best historical buy signals for equities

A trader on the floor of the New York Stock Exchange. Photo: TIMOTHY A. CLARY/AFP via Getty Images.

A remarkable run of gains stretching back 80 years means today’s US midterm elections will provide investors with one of the strongest historical buy signals in equities.

The S&P 500 index has been higher one year after all 20 votes since the Second World War, with large-cap stocks up by an average 15% in the six months after polling day.

The most likely explanation for the run is that elections are a clearing event that allow investors to look ahead with more certainty until the next polling date in two years’ time.

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However, with past performance no guarantee of future results, there are warning signs that this year’s mid-terms could be an outlier.

US markets have never been so expensive heading into the midterms, with the Financial Times reporting that the S&P 500’s cyclically adjusted price/earnings (PE) ratio of 40.7 times is well above the previous election high of 33.8 in October 1998.

In addition, the FT analysis shows a sharp contrast in the S&P 500’s performance in the run-up to election day. Its deepest fall so far in 2026 has been 9%, which compares with the peak-to-trough average decline of 18% in previous election years since 1942.

The US benchmark’s performance has also faltered in recent weeks, having jumped by more than 20% from the post-tariffs low at the end of March to a record 7,844 in early October.

The jitters have been driven by tighter financial conditions, worries about the sustainability of the AI trade and the potential for an escalation of trade tariffs and the Iran war.

The S&P 500's final session before polls opened saw the benchmark surrender an initial 1% gain to close 0.5% lower. Meanwhile, the Nasdaq 100 fell 1.4% to enter technical correction territory, representing a drop of more than 10% since the record high set on 6 October.

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The base case on Wall Street is that Democrats will seize control of at least one chamber of Congress, with UBS seeing a 50% probability of a clean sweep in today’s voting. All 435 seats in the House of Representatives and 35 of the 100 Senate seats are up for grabs.

A split in congressional control is widely regarded as the most market-friendly outcome given that it reduces the chance of large new spending plans, tax changes or sweeping regulation.

Saxo Bank said: “For investors, that could be helpful if it means less fiscal pressure and a better backdrop for bonds. Lower or more stable bond yields could in turn support equity valuations, especially for growth stocks.”

A Democrat clean sweep would not mean a complete reversal of Donald Trump’s agenda as the president would still have veto power. However, it could lead to more friction around regulation and parts of the AI build-out, including data centre and infrastructure projects.

Debt ceiling negotiations may also generate volatility in 2027, although UBS believes that the inflation outlook should still help Treasury yields settle over the next year.

A scenario where Republicans kept control of Congress is the most supportive outcome for the AI infrastructure trade but also raises the risk that bond yields stay elevated.

UBS said: “We would not treat the midterms as a binary directional event for markets. We believe corporate earnings, AI investment, inflation and interest rates will remain more important market drivers.

“Investors should avoid positioning around a single outcome and keep portfolios anchored to durable sources of growth and income.”

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Saxo Bank agrees that US midterms are unlikely to decide the whole market on their own.

It added: “For investors, the real test is whether AI investment can keep delivering growth at a time when bond yields remain high and financing conditions are tighter. That is why the election matters. But the bigger story is still the same: AI versus yields.”

Morgan Stanley said this week that its preference is for companies with durable cash generation, strong balance sheets and improving earnings revisions.

It added “We expect near-term clearing events to provide an attractive opportunity to add risk to quality cyclicals that have de-rated as we head into 2027.”