The 2026 midterm election cycle is underway. While the situation in Iran is dominating headlines, market participants and political prognosticators are starting to shift their focus to which party will control the Senate and the House come election day.
Currently, the Republican party holds a majority in the Senate (53-47) and a narrow majority in the House of Representatives. A Republican sweep in the 2026 midterm elections, meaning full Republican control of the Senate and the House, would maintain the status quo from a policy perspective. That being said, this outcome is currently not the consensus expectation.
The Senate odds are in favor of Republicans. Kalsi market odds currently imply roughly a 60% probability that Republicans win the Senate in 2026. However, that margin has begun to narrow as several competitive races (NC & GA are two examples) move onto the political radar, suggesting the path to a Republican majority may not be as straightforward as early odds implied.
The picture is quite different in the House, where the Republicans’ hold is much more tenuous. Following a seemingly decisive inflection point in mid-October 2025, Democrats are now favored to win the House by wide margin, with betting odds closer to 80%.
However, that does not tell the full story. Betting odds and polling data have caught markets flat-footed before.
Stocks Correct in Midterm Election Years
Midterm election years have historically been more volatile than the average calendar year, a consequence of the political uncertainty that can ensue during the midterm election cycle. On average, the S&P 500 has experienced a peak-to-trough drawdown of roughly 17.5%.
In the most recent midterm cycle in 2022, the S&P 500 had an intrayear drawdown of 25.4%.
By that comparison, 2026 has been tame thus far. Ongoing market rotation and geopolitical stress around the U.S.-Israel conflict with Iran have weighed on stocks recently but the S&P 500 has only experienced a drawdown of 2.6%.
All things considered, this suggests the index has been more resilient than the typical midterm year, though it remains early days.
Sector Positioning for the Midterms
Historical sector positioning reflects the more volatile backdrop that accompanies midterm election years. From the start of the year through election day, Energy has historically been the top performing S&P 500 sector with an average return of 7.9%. Health Care ranks a close second, averaging roughly 6.5%.
Energy’s leadership may reflect its sensitivity to regulatory posturing and policy expectations during election cycles. Health Care’s strength is also somewhat counterintuitive given how frequently it becomes a focal point in campaign rhetoric. However, its defensive profile may also serve in dampening portfolio volatility in the leadup to the midterm election.
What is particularly notable is that this leadership does not persist. Once election outcomes are known and uncertainty fades, sector performance tends to rotate toward the more cyclical areas of the market. On average, Technology (3.2%), Materials (2.3%), Financials (2.1%), and Consumer Discretionary (2.0%) take the baton of leadership from election day through year-end.
In other words, the market often transitions from defensive or policy-sensitive positioning to growth and cyclical exposure once clarity emerges.
What Happens After Election Day?
Midterm election years tend to bring higher volatility and meaningful drawdowns for U.S. stocks. Investors position around perceived probabilities, but those market odds can change dramatically, leading to potentially larger moves.
But history also shows something powerful.
One year after midterm elections, the S&P 500 has been higher 100% of the time since 1950 with an average 1-year forward return of 15.5%. Clarity has historically proven to be a stronger force than uncertainty. Once the political outcome is known, markets tend to refocus on fundamentals, earnings, and economic momentum.
That does not mean volatility disappears. It does mean that the election resolution tends to be a consistent and constructive catalyst for stocks.
No outcome is guaranteed in financial markets. Midterm election years in particular require investors to remain nimble as markets continuously reprice shifting political probabilities. Current betting odds point to a divided government, with a Republican Senate and a Democratic House. However, the narrowing of Senate odds has the potential to spur volatility and create opportunities around underpriced outcomes. While history cannot predict the result, it can provide a useful framework for navigating the volatility that often accompanies these cycles. Impactful events like midterm elections often create powerful opportunities for investors as markets reassess probabilities and reprice outcomes.
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