The Historical Stock Market Lull Ahead of US Midterms

Investors are likely to face a bumpy ride in the months ahead as attention turns to the US midterm elections in November. Goldman Sachs warns that political uncertainty and market volatility typically rise heading into the vote, creating a challenging environment for equities. The bank’s historical analysis shows the S&P 500 has delivered a median return of 0% between the start of August and election day since 1974, essentially flatlining as investors turn cautious.

Once the ballots are counted, however, the picture often brightens. Goldman notes that the index has historically gained a median 6% in the three months following the midterm vote, as uncertainty dissipates and institutional investors rebuild equity positions they had trimmed. Mutual funds and foreign investors, in particular, tend to reduce exposure to US stocks in late summer before re-entering after the election.

While the political backdrop captures headlines, Goldman cautions that rising Treasury yields could pose a more immediate threat. The bank observes that equities have historically struggled to advance when 10-year yields rise by more than two standard deviations in a month — equivalent to roughly a 50-basis-point jump in the current environment. On the election itself, prediction markets imply an 85% probability that Democrats will retake the House, while the Senate remains a toss-up, limiting the scope for unexpected policy swings. Goldman therefore advises investors to focus less on the legislative outcome and more on what the results might signal for the 2028 presidential race.

Why Goldman Expects Pre-Election Stagnation and a Post-Vote Bounce

The Mechanics of the Election-Year Volatility Cycle

Goldman’s research points to a clear pattern: economic policy uncertainty and equity volatility tend to spike in late summer ahead of midterms, prompting risk reduction by key market participants. Mutual funds and foreign investors often scale back US equity positions, contributing to the sideways drift. Once the election passes, that uncertainty quickly recedes, and the positioning unwind reverses, helping stocks rally. The current backdrop of unusually low individual stock correlations also makes holding index-level volatility increasingly attractive, Goldman says, as macro themes — elections, geopolitics, interest rates — overtake company fundamentals as the dominant market driver.

Treasury Yields: the Real Wildcard

While election-related jitters grab attention, Goldman emphasizes that the path of bond yields may be the more potent force for equities. Historically, stocks have struggled when the 10-year Treasury yield shoots up by more than 50 basis points in a single month. With inflation still the top concern for voters, any renewed rise in yields on the back of fiscal fears or hawkish Fed messaging could overwhelm the typical post-election relief rally. Investors who treat the midterm cycle as a reliable playbook need to watch this variable closely.

Why the Result Itself May Not Be a Market Disruptor

Prediction markets are already pricing a high probability of divided government, which drastically reduces the chance of major legislative surprises. Goldman sees little evidence that swings in election probabilities have significantly moved most sectors in recent months, suggesting that markets have already discounted the most likely outcomes. Consumer discretionary stocks have shown the strongest — albeit still modest — relationship with polling shifts, hinting at some sensitivity to the electoral mood, but the broader market remains driven by other factors.

What the Midterm Pattern Means for Portfolio Positioning

  • History suggests the S&P 500 could gain around 6% in the three months after the November vote if the pattern holds. Investors might view any pre-election dip as a temporary dislocation rather than a signal to exit.
  • Watch the 10-year Treasury yield closely: a spike of more than 50 basis points in a single month would undermine the typical post-midterm rally, according to Goldman’s analysis.
  • With low stock correlations making index volatility trades attractive, investors who want to hedge election uncertainty without selling equities could consider volatility-linked instruments rather than outright position reductions.
  • Resist betting heavily on the election outcome. Prediction markets already price a divided Congress, limiting transformational policy moves, so the bigger forward-looking signal may be what the results mean for the 2028 presidential race — not immediate sector plays.