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With the Democrats sweeping both the Senate and House in the US midterm elections, Deutsche Bank noted a preceding market shift, where the S&P 500 has risen 14 percent on average in the 12 months following every midterm election since World War II.
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The bank noted in its recent report that since 1946, the surge was 20 out of 20 times, but warned that 2026 differs from previous cycles, as index concentration is the highest in the historical sample – meaning the performance of a handful of mega-cap stocks will largely determine whether the winning streak continues.
Historical Exceptions: 1930, 1938 and the Near-Miss of 1946
Dating back to 1930, the S&P 500 only saw gains in 22 out of 24 elections – a 92 percent success rate – with an average gain of 13 percent and a median of 13.7 percent.
A “once-in-a-century financial and economic collapse” happened in 1930. It was rather an ordinary political cycle, but a mix of crises crushed the market, including a bank collapse wave, deflation, and the Smoot-Hawley Tariff Act, sending the S&P 500 down 37 percent in the 12 months after the election.
The other occurred in 1938. The end of the recession and the European war caused the S&P 500 to drop 5.1 percent in the 12 months after the election.
1946 was a near miss. The S&P 500 rose only 0.1 percent as post-war inflation and demobilization pressures weighed on the economy.
By comparison, the average gain in ordinary years since 1946 is just 9.1 percent. This means the year after a midterm election outperforms ordinary years by about 4 to 5 percentage points on average, and by about 2 percentage points at the median.
The report noted that all figures are price returns, excluding dividends.
Divided Government Seen as Positive for Markets
The report noted that markets tend to rise after midterm elections as political uncertainty is removed. A divided federal government and policy gridlock also reduces the risk of major policy changes, a positive sign for markets.
However, unprecedented index concentration sets 2026 apart from previous cycles. The S&P 500 is now more concentrated than at any point in the historical sample, with a handful of mega-cap companies driving the vast majority of returns — meaning the index could fall even if most stocks rise, should a few heavyweights disappoint.
Treasury Yields and the Fed Factor
In addition, the Federal Reserve's policy headwind is another important variable. The report noted that the rate-hike cycle currently priced by the market is one of the mildest in history, and a return to the historical normal path would come as a shock to markets.
However, Deutsche Bank fixed-income strategists noted that 10-year US Treasury yields tend to decline after midterm elections, and the yield may fall further, especially when the result leads to another divided federal government.
Combined with current expectations that Democrats will likely win the House, the market's pricing logic around policy gridlock may dominate rate direction in the near term.
