Wall Street’s upbeat outlook for U.S. equities in 2026 may be colliding with one of the market’s most persistent — and underappreciated — seasonal headwinds. According to Bank of America, the second year of the U.S. presidential cycle — the same year the country heads into midterm elections — has historically been a tricky stretch for risk assets.
The takeaway is straightforward: investors betting on a smooth 2026 may be underestimating a well-documented seasonal trap.
See Also: Commodities Are Your 2026 Portfolio Insurance, Here’s Why According To Goldman Sachs
The Mid-Term Year Stock Market Playbook
Stocks have consistently lagged their long-term averages during midterm years. This is particularly the case in the months leading up to the elections.
Since 1871, the S&P 500 has returned an average of just 3.26% in year two of the presidential cycle — roughly half the 6.43% average gain across all years. The odds of finishing the year higher also drop. The index rises only 58% of the time in midterm years, compared with 65% in a typical year.
Notably, the pattern is more pronounced in more recent data.
Since 1940, year two delivered an average gain of 4.22%, versus 8.85% in an average year. Since 1970, the gap has widened sharply. Across 14 observations, midterm years produced an average return of just 0.58%, compared with 9.25% for all years.
In other words, the midterm-year penalty didn’t fade with time. It intensified.
Seasonality within the year also matters. Markets tend to struggle early before stabilizing later.
“January and June appear weak while March is supported,” Bank of America’s chief technical strategist Paul Ciana says.
Since 1970, January has averaged a -1.77% return in midterm years, while June has fallen nearly -2%, both well below historical norms.
| Period | S&P 500 Avg Return Y2 |
S&P 500 Win Ratio Y2 |
S&P 500 Avg Return (All Years) |
S&P 500 Win Ratio (All Years) |
|---|---|---|---|---|
| Since 1871 | 3.26% | 58% | 6.43% | 65% |
| Since 1940 | 4.22% | 57% | 8.85% | 71% |
| Since 1970 | 0.58% | 57% | 9.25% | 75% |
But Then Comes A Stronger Santa Rally
There is, however, an important twist. The final quarter has historically acted as a release valve for pent-up pessimism.
Since 1940, the S&P 500 has risen in the fourth quarter of midterm years 86% of the time, delivering an average gain of 6.6%. In a typical year, fourth-quarter returns average just 3.9%, with a lower success rate.
October and November stand out in particular, with up ratios above 70%, among the strongest in the entire presidential cycle. This creates a distinct midterm-year setup: weakness early, strength late.
2018: When The Mid-Term Year Pattern Broke
But 2018, under President Trump, serves as a reminder that history doesn’t always repeat itself cleanly.
That year, the S&P 500 — as tracked by the Vanguard S&P 500 ETF (NYSE:VOO) — rallied midyear but fell over 13% in the fourth quarter, ending down -6.2% for the year.
The expected Santa rally fizzled as fears over Fed policy and trade wars dominated headlines.
What This Means For 2026
If the past is any guide, stock volatility and modest returns could define the first three quarters in 2026, before conditions improve near year-end.
Bank of America analysis also shows that gold has often been a beneficiary of Wall Street turbulence in midterm years.
Since 1970, gold has risen an average of 15.1% during midterm years, outperforming its long-term annual average.
Nearly 86% of first quarters in midterm years have been positive, followed by a typical pullback in May and June and renewed strength into year-end.
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