Midterm Takes Center Stage: What Does It Mean for Markets & ETFs?

The 2026 U.S. midterm elections are scheduled to be held, in large part, on Nov. 3, 2026. Against this backdrop, at the Republican Party’s first-ever midterm convention in Dallas, President Donald Trump placed himself at the center of the election, urging voters to support Republicans.

Cost-of-Living Concerns

Trump acknowledged that his efforts to lower gasoline prices may not produce visible benefits until after the midterms, potentially adding to voter frustration over the cost of living. Trump’s approval ratings have also fallen to record lows.

Inside Approval Ratings

With less than two months at hand prior to the midterm elections, a Focaldata poll found that only 33% of registered voters approved of Trump’s performance, the lowest level since the FT began tracking it and down three points from the previous month.

$5,000 “Trump Dividend” Proposal

President Trump said he would pay every American adult a $5,000 “Trump dividend” if Republicans retain control of Congress in the November midterm elections. With roughly 270 million U.S. adults, the proposal could cost about $1.35 trillion, although details on funding, implementation and legality remain unclear, per a Reuters article.

Iran War Escalates

Trump said he expects the war with Iran to end after the November elections (which is why energy prices are rising) while again threatening to strike an Iranian nuclear-related site. Meanwhile, attacks on shipping have intensified, raising concerns about further disruption to regional energy supplies.

Historical Market Performance in Midterm Years

Midterm election years have historically been the weakest for U.S. stocks, with the S&P 500 averaging returns of about 7.5% compared with 12.4% across all years, per Morningstar, as mentioned in an article by BlackRock.

The last two midterm years, 2018 and 2022, were among the market's worst since the financial crisis in 2008, per Bloomberg, quoted in the above-mentioned article.

However, markets have often rebounded after elections. Since 1970, stocks have typically rallied in the weeks leading up to Election Day as uncertainty fades, with the S&P 500 gaining an average of 14.1% in the six months following midterms.

Sector Winners and Losers

Sector performance has varied widely during midterm cycles. Historically, Healthcare (10.7% avg) and Energy (8.9% average) have been relatively resilient, while Industrials and Financials have lagged. Still, sector leadership has rarely followed a predictable political pattern, per Bloomberg, as mentioned in a BlackRock article.

State Street Health Care Select Sector SPDR ETF XLV and State Street Energy Select Sector SPDR ETF XLE should also be tracked closely. However, though historical performance of the financial sector is downbeat, we expect the performance of State Street Financial Sel Sec SPDR ETF XLF to remain resilient this year due to solid underwriting fees for mega AI IPOs scheduled ahead.

SpaceX has already created history. Moreover, the merger and acquisition environment remains strong. These activities should boost banks’ investment banking income.

Avoid Letting Politics Drive Investment Decisions

History suggests that reacting to election outcomes can hurt long-term returns. Investors who stayed fully invested in the market significantly outperformed those who moved to cash based on political preferences. So, stay invested in State Street SPDR Portfolio S&P 500 ETF SPYM.

If we look at the average monthly returns of the S&P 500 in midterm election years (going back to 1962), we find that from April to September the S&P 500 has posted negative returns. However, this year has been different. The S&P 500has gained about 12.6% over the past six months, thanks to the AI boom and earnings strength. Hence, midterms should not be a cause for concern.

What to Expect in the Holiday Season?

Since 1974, the S&P 500 has delivered an average return of just 1.7% from Aug. 1 through Election Day, per Charles Schwab. But markets normally see a "relief rally" in the months after an election. Since 1974, the S&P 500 has averaged a 5.7% return in the three months immediately following a midterm election, with 11 of the 13 years producing a positive return. 

And in the six months following a midterm election, the S&P 500 has averaged a 12.4% return across the same years, with all 13 years showing positive returns, per Charles Schwab. All these historical data points indicate a potential rally in ETFs like Vanguard 500 Index Fund ETF Shares VOO and Invesco S&P 500 Equal Weight ETF RSP.

AI: A Key Election and Market Theme

Rapid expansion of AI data centers is boosting electricity demand, raising concerns about energy costs, infrastructure constraints and local economic impacts. Public sentiment toward AI remains mixed, with many voters expressing concerns about its risks.

So, AI may attract increasing political scrutiny, but that is unlikely to derail the winning momentum, as billions have already been invested in AI and robotics.  Worldwide spending on AI infrastructure, services and software is forecast to reach $2.5 trillion in 2026, per Al Jazeera.

It's just that increasing political scrutiny may slow down the momentum a bit. So, overall, staying invested in AI ETFs like Roundhill Generative AI & Technology ETF CHAT should not cause investors any trouble.

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This article originally published on Zacks Investment Research (zacks.com).

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