S&P 500 outpaces typical midterm year; Bank of America flags strong post-election gains

History from Bank of America suggests maintaining exposure through the midterm vote, potentially spurring purchases during any pre-election dip in US stocks. The positive environment is reinforced by powerful fourth-quarter seasonality, coinciding with the S&P 500's proximity to all-time highs. More substantial threats exist beyond the political sphere: energy shocks or rate volatility could overpower seasonal strengths, given precarious oil supply and Treasury yields at decades-high levels. Bond markets might also benefit from increased policy transparency post-election, as worries about government debt are already pushing yields higher.

Convention says midterm election years weigh on equities, yet 2026 is behaving differently. BoA suggests the cycle's strongest phase might be yet to come.

Summary:

• According to Bank of America, drawing on Bloomberg data, the S&P 500 has climbed 13% year-to-date, against a typical midterm-year return of roughly 3%.
• This trajectory sets 2026 up to be the top midterm year for US equities since 2006.
• Since the end of WWII, the index has posted gains in every half-year and full-year period following a midterm, averaging approximately 13% and 14%.
• Since 1930, the fourth quarter, averaging gains of around 5.6%, has been the calendar's strongest period.
• Bank of America emphasizes that corporate earnings, valuations, employment, and investment are ultimately more critical to long-term returns than election results.

US stocks are diverging from the typical midterm election year path, and Bank of America analysts note that post-vote periods historically perform even better. Citing Bloomberg data, the bank pointed out the S&P 500's 13% advance as of late September. This contrasts with the ~3% average in midterm years, placing 2026 on course for the strongest performance since 2006. The bank remarked that each electoral cycle is unique, suggesting history is better applied as a volatility management tool than a predictive one.

The bank views the outlook following the November vote as progressively favorable. Post-WWII, the S&P 500 has never failed to rise in the half-year and full-year after a midterm, with average returns of roughly 13% and 14%. Over a three-month span, it has ended up nine times out of ten.

Seasonality frequently benefits investors late in election years. The fourth quarter, posting average increases of about 5.6% since 1930, has outpaced the earlier three quarters. October has been a positive month roughly two-thirds of instances. Bank of America also noted that more precise US fiscal policy direction after the election could act as a tailwind.

The analysts concede that midterm years typically see heightened market swings. However, they argue that liquidating positions due to fleeting political uncertainty has rarely rewarded long-term holders. Over the long haul, they contend that stock performance and economic health are overwhelmingly shaped by corporate earnings, valuations, the labour market, and capital expenditure, rather than by the winning party.

This thesis might face a reality check in 2026. Equities are advancing while US Treasury yields sit near their loftiest levels in nearly twenty years, a dynamic some strategists caution renders stocks fragile if borrowing expenses continue to mount. Election history provides comfort, though its relevance is secondary to the capacity of earnings expansion to match an elevated cost of capital.