Goldman Sachs: Midterm Elections Historically Bring Volatility, Followed by Market Rally

U.S. equities have historically experienced a period of flat returns and heightened volatility in the months leading up to midterm elections, typically followed by a strong rally once the political uncertainty clears, according to a recent analysis by Goldman Sachs.

Historical Precedent and Volatility

Analysts at the investment bank noted that investor attention is increasingly shifting toward the upcoming November vote, which has historically been a catalyst for market choppiness. The firm's research highlights a distinct pattern in market performance around midterm election cycles.

Key historical findings since 1974 include:

• The S&P 500 has posted a median return of 0% between the start of August and Election Day.
• Following the vote, the index has typically strengthened, delivering a median gain of 6% over the subsequent three months as uncertainty fades.

Goldman Sachs said that economic policy uncertainty and equity volatility tend to rise in the late summer before a midterm vote. This environment often prompts institutional investors, including mutual funds and foreign buyers, to reduce their exposure to U.S. stocks, only to rebuild positions after the election concludes.

Policy Outlook and Investor Focus

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Despite the expected increase in volatility, Goldman Sachs believes the election outcome itself is unlikely to be a primary driver of equity performance or lead to major legislative changes. Prediction markets currently imply an 85% probability that Democrats will regain control of the House, while the Senate race is considered a toss-up, suggesting a divided government is the most likely result.

With major policy shifts improbable, investors are expected to analyze the results for clues about the 2028 presidential election and future policy direction. The report identified inflation as the dominant concern for voters this cycle. It also noted that potential regulation of artificial intelligence is an area with bipartisan support that investors are monitoring closely.

Broader Market Headwinds

Beyond the election, Goldman Sachs warned that other macroeconomic factors could pressure equities, particularly rising Treasury yields. The bank's analysis showed that stocks have historically struggled when the 10-year Treasury yield rises by more than two standard deviations over a month, which it estimates is equivalent to a 50-basis-point increase in the current market.

While most sectors have shown little correlation to shifting election probabilities, the firm found that consumer discretionary stocks have exhibited the strongest, albeit still modest, relationship. For the broader market, macroeconomic issues like geopolitics and interest rate movements remain the more significant drivers.