October has a reputation and heading into the November 3rd U.S. midterm elections, there is no shortage of commentary about what could go wrong.
A lot of this analysis misses the “forest for the trees”.
The tendency for there to be volatility ahead of the U.S. midterm elections is real, but so is the historical record of what tends to happen after them. Understanding both is what separates a good financial decision from a poor one.
What is the U.S. presidential election cycle and why does it matter for investors?
The U.S. presidential election cycle theory observes that stock market returns tend to follow a consistent four-year pattern tied to the presidency. Year one is the election year. Year two is the midterm year. Years three and four historically produce the strongest returns as policy clarity emerges and economic conditions are managed with re-election in mind.
Year two — the midterm year — is the weakest of the cycle. According to Fidelity, since 1950, the S&P 500 has averaged returns of roughly 4.8% in midterm years, the lowest of any year in the four-year sequence. It also tends to be the most volatile.
2022 was the last midterm year and it was a tough one.
2026 is year two again. The pattern is running true to form but with a twist. This year, major indexes have held up well on the strength of technology stocks but many other sectors are seeing pullbacks.
What has historically happened to markets after U.S. midterm elections?
This is where the data becomes compelling.
According to Capital Group, since 1950, the S&P 500 has never been lower in the 12 months after election day. Nineteen midterm elections and nineteen positive 12-month returns for a 100 percent track record across more than seven decades. The average gain in those 12 months is 15.4% vs. 7.8% in an average of all other years.
FactSet data also shows that the October-to-June period (Q4, Q1, and Q2) is responsible for most of the positive 12-month returns with historical returns averaging about 19% since 1950. This is the strongest stretch of returns in the entire four-year presidential cycle.
Unsurprisingly, year three of the presidential cycle (the year that follows the midterm) is historically the strongest of the four. Based on research from Fidelity, since 1938, the S&P 500 has posted a positive return in year three 95% of the time, with an average annual gain of approximately 14.5%. The post-midterm window is not just one strong quarter; it tends to be the beginning of the best sustained stretch in the cycle.
Pattern is not prediction, but when something has happened with this level of consistency over a very long period, it deserves to be part of the analysis.
Does October volatility before midterms matter?
Only if your time horizon is very short-term.
Based on history, there is a high likelihood of some pre-election volatility that is a part of and does not negate the longer-term set-up.
If markets pull back in the weeks before November 3, history suggests that it is a buying window. The investors who have benefited most from the post-midterm pattern are the ones who held (or bought) through the October noise rather than reacting to it.
Are earnings, valuations, and investor sentiment supporting the historical pattern in 2026?
The election cycle argument does not stand alone. The current fundamental picture reinforces it on three fronts.
First, earnings growth has been and is expected to remain strong. Based on FactSet data, analysts are projecting S&P 500 earnings growth of 32.4% for 2026. That is the kind of momentum that tends to drive sustained market performance regardless of the political backdrop.
Second, valuation. According to FactSet, the forward price-to-earnings ratio for the S&P 500 currently sits at 19.0x which is below the five-year average of 19.8x and slightly below the ten-year average of 19.1x. Markets have risen, but earnings have risen faster and because of this the index has become cheaper on a forward-looking basis even as prices have moved higher.
Third, sentiment. The AAII Investor Sentiment Survey (which has tracked individual investor expectations since 1987) saw bearish sentiment rise to 46.5% for the week ending September 30, 2026, well above the long-term historical average of 31.0%. Elevated pessimism is a contrarian indicator. Historically, periods when bearish sentiment significantly exceeds its historical average have preceded above-average market returns. The “crowd” tends to be most negative closest to the bottom.
All three data points point in the same direction as the historical cycle pattern.
What should Canadian investors do with this information?
Not lose sight of the fact that October headlines (or any other headlines) do not tell the full story.
The appropriate response is to understand what the historical pattern says, recognize the current fundamental conditions that support it, and hold a well-constructed plan through the noise that precedes the opportunity.
The worst financial decisions in any given four-year cycle tend to be made in October of the midterm year. That is precisely when the data is most clearly on the side of patience.
If you have questions about how this applies to your specific portfolio or want to understand more about how the Kluge Wealth Advisory Group uses fundamental, technical and quantitative data to manage through “the noise”, reach out any time. That is exactly the kind of conversation our Wealth Road Map process is built for.
Sources: Fidelity Investments midterm election market research | Sequoia Financial midterm year historical analysis 2026 | FactSet Earnings Insight Q3 2026 | Interactive Brokers S&P 500 seasonality and presidential cycle analysis 2026 | AAII Investor Sentiment Survey (aaii.com) | SoFi presidential election cycle theory | Goodreid Investment Counsel presidential cycles and markets
Conrad Kluge CFA, CFP®, Senior Wealth Advisor, Senior Portfolio Manager, leads the Kluge Wealth Advisory Group and is a financial advisor at Wellington-Altus Private Wealth, working with high-net-worth families in Calgary, Alberta. This post is for informational purposes only and does not constitute investment advice. Please consult with a qualified financial professional regarding your specific situation.