U.S. Stocks Feeling the Pressure of Midterm Elections

Markets typically regain upward momentum in the months following elections.

Written by: Bu Shuqing, Wall Street Insights

The U.S. stock market is quietly entering a sensitive period as indicated by historical patterns. Despite strong corporate earnings, the S&P 500 index has been nearly stagnant since early May, leading market participants to consider a potential explanation: the gravitational effect of the midterm elections is becoming apparent ahead of time.

According to research by Deutsche Bank strategist Jim Reid, historical data shows that the S&P 500 often performs poorly in the year leading up to the midterm elections, with summer particularly prone to corrections. However, in the months following the elections, the market typically regains upward momentum—since World War II, the S&P 500 has never recorded negative returns within nine months after any of the 20 midterm election cycles. This pattern suggests that the current relative weakness in the market may not be due to a deterioration in fundamentals, but rather that election uncertainty is causing investors to adopt a wait-and-see approach.

The current cycle is further complicated by additional factors. The Iran war and the resulting rise in oil prices are putting pressure on government approval ratings, and as the elections approach, this situation may influence the U.S. government's strategic orientation towards Iran, adding new variables to the market.

Strong Earnings, Yet Unable to Boost the Index

The stagnation of the S&P 500 index is not due to weak fundamentals.

Deutsche Bank equity analysts point out that the second-quarter earnings season has been exceptionally strong so far. With about two weeks into the earnings season and roughly one-third of the constituents having reported, nearly 90% of companies exceeded expectations, with overall earnings about 10% higher than market consensus.

The S&P 500's second-quarter earnings growth is currently expected to reach 34% year-on-year, significantly surpassing the previously optimistic consensus of 26%. This indicates a clear divergence between the stagnation at the index level and the improvement in micro-level earnings, suggesting that the market's

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