With the start of the fourth quarter, the US midterm election season is in full swing. More ads, bigger promises, and strong warnings about what could happen if the other party wins are everywhere. This is a familiar pattern, but history shows it is worth focusing on what becomes more difficult after the election: passing major legislation.
Please note: Our political commentary is nonpartisan and nonideological by design. We favor no political party or candidate. We assess politics solely for potential capital market impacts.
This is the basis for what many in capital markets call the “Midterm Miracle.” It refers to the nine months covering the fourth quarter of a US midterm year and the first two quarters of the next year.
The numbers deserve attention. The S&P 500 delivered positive total returns in 23 of the 25 completed periods from the 1926 midterms to the 2022 midterms. That is 92% of the time, with an average cumulative gain of 19.8%, including dividends. While these are historical results and do not predict the future, they provide helpful context when campaign headlines seem negative about the economy.
Why does this pattern happen? It starts with the US president’s schedule. Presidents know their party often loses seats in the midterms, so they try to pass their biggest legislation in the first two years, when they have the most political strength.
By the time the midterm elections come around, much of the president’s agenda has either passed, stalled, or been reduced through negotiation. Losing seats makes it even harder to pass what is left.
According to Brookings, from 1910 to 2022, the president’s party lost House seats in about nine out of ten midterm elections and Senate seats in about seven out of ten.
For markets, the key issue is how these changes affect legislative risk. Major laws create winners and losers. A tax change helps some and costs others. New regulations change competition. Spending choices shift resources. As a result, businesses may wait to invest until they know the rules.
Gridlock limits how many changes can actually pass. This provides companies a more stable environment for hiring, investing, and planning.
Washington can stay loud even as it becomes less able to change the rules. The most obvious case is a divided government, where an opposition-controlled House or Senate can block the president’s plans. Gridlock can also happen within the ruling party. A slim majority leaves little room for disagreement, and members often have different views on priorities, spending, and what their voters want.
The Senate’s election cycle adds another wrinkle. Senators elected this November will serve six-year terms. Those elected two years ago still have four years left. Since President Trump is in his final term, about two-thirds of senators will face voters after he leaves office. Their political timelines are becoming more separate from his.
Candidates with stronger ideological views can deepen these divisions. Their language may worry investors, but their unwillingness to compromise often makes it harder to pass major laws. Winning a majority and keeping it united are two different challenges.
For 2026, that leaves several routes to greater gridlock. Democrats might win one or both chambers. Republicans could keep control but with margins too narrow to unite different groups. For capital markets, the main question is how much policy change the new Congress can actually achieve.
As election races become clearer, uncertainty starts to fade. This helps explain why a shaky first half of the year in markets does not always break the historical pattern. Midterm years often see early volatility as Bay Street and Wall Street react to campaign proposals and different forecasts.
This pattern has lasted longer than most have been alive, yet every midterm, many continue to say, “it’s different this time.” Strong political beliefs may explain this. People often think their party’s win will help markets and the other party’s win will hurt them. This belief persists even though plenty of evidence contradicts it.
Markets react to both expectations and actual results. When changes people fear turn out to be harder to implement than expected, it’s a positive for capital markets, even for those unhappy with the election outcome.
Of course, a fictitious nine-month calendar is not a perfect system. Earnings, inflation, interest rates, and economic growth still play important roles. Gridlock cannot stop every policy surprise either. Still, a heated US election can mean businesses face fewer unexpected changes. That quieter outlook may be more important to markets than any campaign promise. Enjoy the gridlock; markets likely will.
