Market momentum so far this year has been driven by Middle East tensions, rising energy prices and changing interest-rate expectations. However, now that half of the year is about to pass, attention shifts to the U.S. midterm elections, and investors are assessing how politics could affect portfolios.The 2026 U.S. mid-term elections are scheduled to be held, in large part, on Nov. 3, 2026.
Historical Market Performance in Midterm Years
Midterm election years have historically been the weakest for U.S. stocks, with the S&P 500 averaging returns of about 7.5% compared with 12.4% across all years, per Morningstar, as mentioned in an article by BlackRock.
The last two midterm years, 2018 and 2022, were among the market's worst since the financial crisis in 2008, per Bloomberg, quoted in the above-said article.
However, markets have often rebounded after elections. Since 1970, stocks have typically rallied in the weeks leading up to Election Day as uncertainty fades, with the S&P 500 gaining an average of 14.1% in the six months following midterms.
Sector Winners and Losers
Sector performance has varied widely during midterm cycles. Historically, Healthcare (10.7% avg) and Energy (8.9% avg) have been relatively resilient, while Industrials and Financials have lagged. Still, sector leadership has rarely followed a predictable political pattern, per Bloomberg, as mentioned in a BlackRock article.
State Street Health Care Select Sector SPDR ETF XLV and State Street Energy Select Sector SPDR ETF XLE should also be tracked closely. However, though historical performances of the financial sector are downbeat, we expect the performance of State Street Financial Sel Sec SPDR ETF XLF to remain resilient this year due to solid underwriting fees for mega AI IPOs scheduled ahead.
SpaceX has already created history. Moreover, mergers and acquisitions are strong. These activities should boost banks’ investment banking income (read: IPO Windfall for Wall Street: Bet on Bank Stocks & ETFs).
Avoid Letting Politics Drive Investment Decisions
History suggests that reacting to election outcomes can hurt long-term returns. Investors who stayed fully invested in the market significantly outperformed those who moved to cash based on political preferences. So, stay invested in State Street SPDR S&P 500 ETF Trust SPY. Morgan Stanley and Goldman Sachs boosted the S&P 500’s2026 target to 8,000, citing strong AI, per Reuters (read: Guide to the S&P 500 ETF Investing).
AI: A Key Election and Market Theme
Rapid expansion of artificial intelligence (AI) data centers is boosting electricity demand, raising concerns about energy costs, infrastructure constraints and local economic impacts. Public sentiment toward AI remains mixed, with many voters expressing concerns about its risks.
In a recent poll, 46% of voters viewed AI negatively compared to 26% positively, while 57% believe the risks of AI outweigh the benefits, per data by NBC News, quoted on BlackRock.
So, AI may attract increasing political scrutiny, but that is unlikely to derail the winning momentum, as billions have already been invested in AI and robotics. Worldwide spending on AI infrastructure, services and software is forecast to reach $2.5 trillion in 2026, per Al Jazeera.
It's just that increasing political scrutiny may slow down the momentum a bit. So, overall staying invested in AI ETFs like Roundhill Generative AI & Technology ETF CHAT should not cause investors any trouble.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
