Why US midterm elections could power the next stock market rally

I OFTEN say stocks pre-price all well-known data, news and opinions. Yet, a near-magical stock market trend is fast approaching, despite recurring every four years.

This stems from America’s November midterm legislative elections – launching what has historically been an exceptionally positive nine-month span for stocks, with effects spilling over to Singapore and beyond. I’ve long called it the “midterm miracle”.

US midterms routinely increase the likelihood of political gridlock, making sweeping legislation harder to pass for the following two years – a reality my 2026 forecast touched on.

While voters may dislike such inaction, stocks often welcome the reduced legislative uncertainty. Yet, near-universal political and ideological biases can obscure this pattern, facilitating the miracle’s regularly recurring, bullish surprise power.

America’s fixed four-year presidential term creates recurring legislative patterns. Presidents enter office knowing their party has historically tended to lose congressional support in the midterms. That raises the urgency to push their biggest, most controversial Bills in their first two years.

This cycle, it was US President Donald Trump’s “One Big Beautiful Bill”. But presidents of both parties have followed this pattern.

Big legislation creates winners and losers – stirring increased uncertainty that stocks hate.

Hence, stocks frequently waver amid the legislative onslaught in the first two years of presidents’ terms. Historically, such years have been positive only slightly more often than negative.

The second year, as in 2026, also brings midterm campaigning. Initially, shrill, extreme rhetoric grabs headlines as candidates play to their parties’ bases to win primary elections.

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A heavier legislative docket and that rise in bombastic politicking help explain why, over the past century, the S&P 500 was positive in only 46 per cent, 58 per cent and 60 per cent of midterm years’ first three quarters in US-dollar terms, respectively.

But then, midterms usually whack the president’s party. Since the first regular Senate elections following the 17th Amendment in 1914, the president’s party has usually lost congressional seats in midterm elections.

From 1934 through 2022, it lost an average of 27 House seats and three Senate seats. When a president has less legislative power, lawmaking typically becomes more difficult. Stocks smile.

Since 1925, according to Fisher Investments’ calculations, the S&P 500 gained in 84 per cent of midterm-year fourth quarters – and 88 per cent of the following year’s first and second quarters.

Across the full nine-month period, returns were positive 91 per cent of the time, averaging 19.8 per cent in US-dollar terms.

Highly correlated markets can take America’s miracle global. US and non-US stocks’ correlation is 0.83 – quite high given that 1.00 means lockstep movement and minus 1.00 signals movement in opposite directions.

The Straits Times Index and S&P 500’s correlation is lower but still meaningfully positive, at 0.58.

Hence, what helps US stocks can help global stocks, too – as it happened four years ago, when the S&P 500 leapt 25.7 per cent in US-dollar terms from Q4 2022 to Q2 2023, while non-US stocks soared 23.7 per cent in local currencies.

Singapore stocks’ lack of big tech exposure and heavy bank skew meant lower but still positive 5.6 per cent gains.

Extreme campaign rhetoric reigns now. Some fear the rise of Democratic Socialist candidates. Others hate Trump, whose approval ratings have fallen sharply amid his administration’s wild vicissitudes.

Ignore the partisan noise. What matters for markets is the legislative landscape after November – and whether the election produces greater gridlock.

Trump’s Republicans currently have narrow majorities in both chambers. In November, every House seat is up, along with 35 Senate seats. Only a relatively small number of House races are highly competitive, making them crucial to control of the closely divided chamber.

In the Senate, several races – including Alaska, Michigan, New Hampshire, Ohio and Texas – are considered competitive by election analysts.

Prediction markets, polls and election forecasters currently point in different directions across these races. They are useful snapshots of expectations, not guarantees of how voters will ultimately decide.

Whatever November’s precise result, history suggests the president’s party has often lost congressional ground in midterm elections. With today’s already narrow margins, even modest seat losses could make major, divisive legislation harder to pass.

Yes, Trump can still act through executive orders and other presidential powers. But his ability to enact major legislation depends heavily on Congress – and divided government, or simply narrower congressional majorities, can constrain that avenue.

Ignore the scary midterm rhetoric. If history rhymes, the quieter political environment that often follows midterms could provide a more favourable backdrop for stocks – in the US, Singapore and beyond.