Trump faces his second midterms next week. If the historic trend continues, it will kick off the best market year of his second term.
History says that the year following a midterm is the S&P 500’s strongest of the presidential cycle, but several hidden forces in today’s market could finally end that invincible streak.
Voters will go to the polls on November 3 for President Trump’s second midterm election. With one week to go, predictive markets see Democrats as the favorites to sweep Congress. For stock investors, the most useful history covers what typically happens after the votes are counted.
According to Opening Bell Daily, since 1950, the year following a midterm (the third year of the four-year presidential cycle) has been by far the strongest year for the S&P 500. The index recorded an average calendar year price increase of 17.2% during the third year. Opening Bell Daily found that the first year averaged 8.4%, midterm years averaged 4.6%, and the fourth year, the election year, averaged 8.1%.
Losses in the third year were also small. The S&P 500 fell in just two pre-election years, 2011 and 2015, each by less than 1%. Opening Bell Daily names 1995 as the third best year, up 34.1%, and puts 2023’s gain at 24.2%.
How a typical third year compares to Trump’s second term
During the Trump years, we used the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) as a replacement for the S&P 500, measuring price performance over a calendar year from close to year-end. This corresponds to the price gain basis behind the averages above.
In 2025, its best full year of this term so far, SPY is up 16.35%. A typical third year would be slightly ahead of this result. This year is still in progress: SPY is up 12.83% year to date as of noon on October 27, with two months to go. Compared to 2028, its final year, the comparison is based solely on historical trend, and the third year average is much higher than the fourth year average.
His first term followed the script. In the third year of his first term, SPY gained 28.79%, ahead of 2020’s 16.16% gain. His first half offers a lesson in patience: The S&P 500 fell 9.0% between Election Day and December 31, 2018, but was up 11.7% a year after that vote.
A second criterion: the 12 months after the vote
A different window, starting on Election Day rather than January 1, tells a similar story. Opening Bell Daily, the S&P 500 has risen in the 12 months following 19 midterm elections since 1950. The average gain is 15.1% and the median is 14.5%. Opening Bell Daily lists the best period at 33.2% after 1954 and the worst at 1.1% after 1986.
Truist Financial (NYSE: TFC | TFC Price Prediction) Chief Strategist Keith Lerner, in research cited by Yahoo Finance, found that every midterm year since 1946 was followed by a positive one-year return averaging 14.4%, with the best being 34% in 1954, matching OBD. The short-term trend has been positive: Opening Bell Daily reports that the fourth quarter of mid-term years saw an average gain of 6.6%, finishing higher in 16 of 19 cases.
Why 2027 could break the pattern
Nineteen midterm exams are a small sample and results vary widely. Opening Bell Daily notes that only 11 of the 19 midterm years since 1950 have finished higher. They also found that midterm years had an average peak-to-trough decline of 17.5%, compared to 11.2% to 13.3% in other years. The largest decline this year through October 16 was 9.1%.
Morgan Stanley (NYSE: MS) said, “The type of majority matters more than which party wins from a stock market perspective. » The background also appears harsher than average. The 10-year Treasury yield stood at 5.00% on October 23 and the University of Michigan Consumer Confidence fell to 48.1 in September. The VIX closed at 18.39 on October 26, within its normal range. Stocks have also already posted double-digit gains this year.
What ordinary investors can learn from the cycle
The presidential cycle is an average of past results and describes a correlation rather than a cause. Earnings, rates and valuations determine returns, with elections and presidents playing a lesser role. If this trend continues, 2027 will be the best market year of Trump’s second term. If it fails, investors who reorganized their portfolios around an election would bear the cost.
The healthiest approach is a long-term plan that can absorb a difficult time around the vote. In the coming weeks, keep an eye on the November 3 results, the size and shape of any new majority and whether the 10-year yield holds near 5%.
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