DB CoTD The gravitational pull of midterms

CoTD: The gravitational pull of midterms?

The CoTD will start to wind down for the summer over the next week, with next Monday’s edition the last until September. Every August, I shut myself in a dark room and plough through the data for the annual Long-Term Study, which will be published in the autumn/fall.

When we return after the summer break, one issue is likely to loom large: the US midterms and their impact on markets.

For context, the S&P 500 has been broadly flat since early May. While the Mag-7 have declined over that period and have largely moved sideways since last September, other sectors have performed well. The market’s lack of progress is certainly not down to earnings. As our equity analysts highlight here, Q2 results have been exceptionally strong so far. Two weeks into the season and roughly a third of the way through reporting, nearly 90% of companies have beaten expectations, with aggregate earnings coming in around 10% above consensus. S&P 500 earnings growth for Q2 is now on track to reach 34% year-on-year, comfortably above the already lofty consensus expectation of 26% and our equity strategists’ forecast of 29%.

Could the market’s relative lethargy instead reflect the typical midterm election pattern beginning to emerge? Today’s CoTD, which appeared towards the back of our WOW! pack (link here), shows that the year before US midterms has historically been a subdued one for the S&P 500, with equities often experiencing a summer dip ahead of the vote. However, a couple of months after the election the market tends to regain its mojo, and by nine months later it has never been lower in any of the 20 midterm cycles since WWII.

It is therefore possible that markets are already feeling the gravitational pull of the midterms. This cycle is, of course, complicated by the war in Iran and the impact of higher oil prices on approval ratings. As the election approaches, that could influence the US administration’s strategy towards Iran. More broadly, though, the chart suggests that uncertainty surrounding the election outcome may itself be enough to keep investors cautious until the result is behind us, regardless of Iran.

For more on the US midterms and what investors need to know, see our US team’s chartbook published earlier this month (link here). It covers the ballot landscape and battleground map, historical election patterns, 2026 voter sentiment and key issues, among other topics.