With the US midterm elections set for November 3rd, Wall Street is reaching for its usual election-year playbook. But many strategists caution that the bigger swing factors for stocks are corporate earnings, Federal Reserve policy, and the durability of the AI spending boom—not which party ends up controlling Congress.
The midterm election is a known date on the calendar, and that alone can create market volatility. But the underlying drivers of stock prices—profits, interest rates, and the technology investment cycle—are what investors should focus on, according to several banks and asset managers.
The midterm 'playbook' and its limits
Midterm years come with a comforting statistic: since 1950, the S&P 500 has averaged a solid gain in the year following midterms, according to J.P. Morgan Asset Management. That historical pattern often leads investors to expect a post-election rally.
But those are long-run averages, not a roadmap for any single cycle. The current backdrop is already busy: the S&P 500 is up close to 12% so far this year after a tech-heavy rally, while analysts expect strong third-quarter profit growth for the index. That means the market is starting from a relatively high base, and any disappointment in earnings or guidance could weigh on stocks regardless of the political outcome.
Strategists point out that elections tend to shift leadership within the market more than they change the market's overall direction. Control of the House and Senate can influence taxes, spending, and regulation, but big policy swings are harder when power is split and the White House still has veto power. So while a change in control could benefit certain sectors—like defense or healthcare—it rarely rewrites the entire investment landscape.
What really moves markets: earnings, Fed, and AI
The three factors that strategists say matter most are all fundamental, not political. First, earnings: with the S&P 500 already up double digits this year, valuations are stretched. Strong profit growth is needed to justify those prices. If third-quarter results disappoint, the market could struggle even if the election outcome is favorable.
Second, Federal Reserve policy. Markets are currently repricing interest-rate expectations after the Fed's first rate hike in more than three years and its signal that more tightening could follow. Higher rates matter because they raise the “discount rate” investors use to value future corporate profits, which can put pressure on stock valuations. In plain terms, when rates go up, future earnings are worth less today, so stocks—especially growth and tech names—tend to feel the squeeze.
Third, the AI spending cycle. The recent tech rally has been driven in large part by enthusiasm for artificial intelligence, with companies pouring billions into data centers and AI infrastructure. But there are growing questions about how long that spending boom will last. If companies start to pull back on AI investments, the tech-heavy S&P 500 could lose a key support. For more on this, see our coverage of AI spending doubts hitting hedge funds and the broader pivotal week for US stocks.
What the election means for your portfolio
For everyday investors, the midterm election is a volatility date for the S&P 500, not just a political one. Because the result lands on a single, known date, investors often turn to short-dated index options as insurance. That demand can lift implied volatility—the market's estimate of future swings baked into option prices—which makes hedges pricier and effectively builds an extra “event premium” into stocks.
Once results are in, that extra premium often fades quickly, even if the policy debate drags on. If that pattern holds, early-November option pricing could loosen up, lowering hedging costs and making it a bit easier for the S&P 500 to hold onto its roughly 12% gain so far this year without needing an immediate new catalyst from earnings or the Fed.
That doesn't mean investors should ignore the election. Control of Congress can shape tax policy, infrastructure spending, and regulation—all of which affect specific sectors. But for the broad market, the historical pattern is that the year after midterms tends to be positive, regardless of which party wins. The key is to focus on the fundamentals that actually drive stock prices over time.
As always, it's worth remembering that past performance is not a guarantee of future results. The midterm playbook is a useful historical reference, but it's not a crystal ball. Investors should keep an eye on earnings season, Fed meetings, and any signs that the AI spending cycle is slowing—those are the forces that will likely determine where the market goes next.
