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When political headlines change, opportunities may follow
Midterm election years have historically been volatile, but the bigger risk may be missing out on what comes next
- Midterm U.S. election years have historically experienced the widest range of return outcomes for investors and some of the largest drawdowns of the four-year presidential cycle.
- Since 1961, Year 3 of the election cycle has historically delivered strong average returns with a smaller average drawdown versus the other years.
- A pre-election pullback is still possible, but history suggests long-term investors have generally been rewarded for staying invested.
- Strong earnings growth and improving market breadth suggest investors should continue focusing on fundamentals, not headlines.
For most of 2026, investors have been focused on geopolitics—from trade negotiations to Middle East tensions and energy markets.
Expect more of the same heading into November: Political headlines, policy debates, and market volatility all could increase as the U.S. approaches the midterm elections.
That wouldn’t be surprising.
Going back to the early 1960s, midterm election years have been more volatile than any other year of a four-year presidential cycle, producing the widest range of average drawdowns and gains (Exhibit 1).
Exhibit 1: Quarterly average S&P 500 price returns by presidential cycle (1961–2024)
| Market drawdown | NTM return | |
|---|---|---|
| Year 1 | -12.3% | 7.8% |
| Year 2 | -19.4% | 31.0% |
| Year 3 | -11.6% | 18.7% |
| Year 4 | -13.3% | 24.4% |
Past performance is no guarantee of future results. Provides current themes and views of the Capital Markets Specialist Group within Fidelity Institutional, as of 6/30/26. Individual views or outlooks may differ. Views are not intended to be substitutes for strategic asset allocation and reflect market views based on current economic conditions. Diversification does not ensure a profit or guarantee against a loss. The statements and opinions are subject to change at any time, based on market and other conditions. Source: S&P 500 data from FactSet, as of 3/31/26. NTM = Next Twelve Months.
Investors should keep two things in mind as the midterms get closer: (1) the history of Year 3 returns within the election cycle and (2) the strength of the broader-market backdrop.
Year 2 has often been the admission price for taking part in Year 3
The historical lesson of the presidential cycle isn’t that investors need to avoid Year 2 volatility: It’s that they often have to endure it. Year 2 has often produced strong gains, but a wider range of results, in general.
Therefore, the biggest risk for investors over the next several months may not be the volatility: It may be a knee-jerk reaction to avoid it at precisely the point in the cycle when history has often rewarded patience.
Since 1961, Year 3 of the election cycle has produced a healthy gain, on average, but importantly, a lower average drawdown than the other years. Over roughly the past 65 years, it’s been a year in the cycle that investors haven’t wanted to miss.
The big-picture trends still appear constructive
Politics may drive the headlines, but historically, earnings and market breadth have had far more to say about whether equity markets can continue advancing.
According to FactSet, analysts currently expect S&P 500 earnings growth of roughly 23.6% year over year in Q2. If achieved, it would mark a second consecutive quarter of earnings growth above 20%.
Earnings estimates have also moved higher for the quarter. This reflects increasing optimism from analysts, but a higher hurdle for stocks to keep climbing.
Investors faced a similar setup last quarter: Consensus expectations reached as high as 14%, and actual Q1 earnings growth nearly doubled expectations. Companies delivered exceptionally strong beat rates, and aggregate earnings surprises reached levels not seen in years.
There’s no guarantee that this performance will be repeated, although the Q1 results suggest that elevated expectations alone are not necessarily a bearish signal amid a strong earnings backdrop.
Market breadth matters too
Investors should pay attention not only to the level of earnings growth, but also where the growth is generated. Increasingly, it’s been from a range of companies beyond just the mega-cap technology names.
A simple test of market breadth is whether the average stock is keeping pace with the cap-weighted S&P 500 index. It generally has in 2026, as the S&P 500 Equal Weight Index has slightly outperformed the S&P 500 index so far this year (Exhibit 2).
Exhibit 2: S&P 500 Equal Weight vs. S&P 500
Past performance is no guarantee of future results. Source: Factset and Fidelity Investments, as of 7/10/26.
This is not proof of a broad market rotation, but it’s an encouraging sign that market leadership may be expanding beyond a relatively small group of companies.
Conclusion
There will almost certainly be uncomfortable moments ahead for investors, possibly related to the upcoming election.
That’s not the point: It’s whether investors can stay disciplined enough to look beyond the political news headlines to take part in what has historically followed.
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The FI Capital Markets Strategy Group synthesizes economic analysis and market outlooks from across Fidelity to provide timely, actionable perspectives for financial advisors and institutional investors. Our Asset Class Specialist team offers in-depth analysis and positioning views focused on equity, fixed income, and alternative investments, including a range of ETF offerings.
S&P 500® is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500 is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates.
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