The midterm elections will raise focus on US equity index volatility

Overview

This report discusses the potential impact of the 2026 US midterm elections on the US equity market, and evaluates the market implications by combining historical election cycles, policy uncertainty, investor fund flows, S&P 500 volatility, interest rate risk, and earnings forecasts. The core judgment is that as the election approaches, investors will pay more attention to macro and policy risks, which is more likely to lift index volatility in the short term rather than directly determine stock direction.

Core views

Goldman Sachs believes that ahead of the midterm elections, US equities tend to trade sideways, demand for equities is weak, and policy uncertainty and volatility rise; after the election, as uncertainty declines, stock returns usually improve. Current constituent correlation is extremely low, suppressing index volatility, but the importance of macro factors such as elections, geopolitics, inflation data, and interest-rate volatility is rising, which may push index volatility higher. Regarding the election outcome, prediction markets have already largely priced in the probability of Democratic control of the House, and much of the recent political uncertainty is unrelated to legislation, so the outcome itself may have limited marginal impact on the equity market.

Analysis framework

The report uses a combination of historical midterm election cycle comparisons, policy uncertainty indicators, observations of S&P 500 historical returns and volatility, mutual fund and foreign investor flow analysis, prediction market probabilities, regressions on industries/factors/thematic baskets, earnings season data, and Goldman Sachs’ top-down index forecasts.

Methodology notes

• Macro event studyMidterm election cycle analysis

  Compare changes in S&P 500 returns, policy uncertainty, and volatility before and after midterm election years since 1974.

  This framework is used to assess whether market behavior around elections exhibits repeatable seasonality or political-cycle characteristics.

• Derivatives and volatilityImplied correlation and index volatility analysis

  Use implied correlation among S&P 500 constituents to explain the difference between single-stock volatility and index volatility.

  When constituent correlation is very low, index-level volatility can still be suppressed even if volatility is elevated at the single-stock or factor level.

• Quantitative regressionElection probability sensitivity regression

  Regress returns of US industries, factors, and thematic baskets on changes in prediction-market election probabilities, while controlling for changes in 10-year Treasury yields and crude oil prices.

  This method is used to identify which equity market segments have recently shown correlation with changes in the probability of election outcomes.

• Valuation and forecastingTop-down S&P 500 forecast

  Combine EPS, P/E, and strategist target levels to forecast S&P 500 returns.

  This framework is used to translate macro and earnings views into index targets and expected returns.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• S&P 500

  Core covered asset

  Strengths

  Goldman Sachs sets a year-end 2026 target of 8000 and a 12-month target of 8300, implying positive returns; historical returns usually improve after the election.

  Weaknesses

  Historically, the market has often traded sideways before midterm elections, while policy uncertainty and volatility rise and demand for equities is weak.

  Comparison

  Across the past 13 midterm election years, the median return from early August to Election Day was 0%, while the median return over the 3 months after the election was 6%.

  Risks

  A rapid rise in interest rates, macro shocks, inflation, and persistent policy uncertainty.

• US equity index volatility

  Short-term beneficiary asset/strategy direction

  Strengths

  Implied correlation among constituents is at multi-decade lows, suppressing index volatility; rising focus on macro events may push index volatility higher.

  Weaknesses

  AI-driven trading, earnings season, and option overwrite strategies may continue to suppress correlation.

  Comparison

  Current single-stock and factor volatility are higher than index volatility, creating an unusually wide gap.

  Risks

  If macro risks do not heat up or correlation remains low, upside in index volatility may be limited.

• US consumer discretionary sector

  Exception in correlation with election probabilities

  Strengths

  The report identifies a recent negative correlation with changes in Republican win probability, making it one of the sectors to watch for election sensitivity.

  Weaknesses

  The correlation is not especially strong, and most industries have limited relationship with election probabilities.

  Comparison

  Compared with other industries, factors, and thematic baskets, consumer discretionary is a more visible but still not strong exception.

  Risks

  The correlation may be unstable as oil prices, interest rates, or other macro variables change.

• US long-term Treasury yields

  Equity risk factor

  Strengths

  Can serve as a macro variable for judging pressure thresholds on equities.

  Weaknesses

  A rapid rise in yields is usually unfavorable for equity valuations and risk appetite.

  Comparison

  The report says that when rates rise by more than two standard deviations over a given period, equities usually come under pressure.

  Risks

  A rise in the 10-year nominal yield to around 5% or the real yield to around 2.7% could weigh on US equities.

Key data

• Midterm election date2026-11-03The report states this is about 3 months from publication.
• Historical median S&P 500 return before Election Day in midterm election years0%Based on 13 midterm election years since 1974, from early August to Election Day.
• Historical median S&P 500 return in the 3 months after midterm elections6%Uncertainty usually declines after the election, and stock returns improve.
• Probability Democrats win the House约85%Source: prediction markets; the Senate outcome is close to a toss-up.
• Mutual fund cash change before midterm elections+0.4% AUMAverage cash increase in the 3 months before the last 10 midterm elections.
• Mutual fund cash change after midterm elections-0.6% AUMAverage cash reduction in the 3 months after the last 10 midterm elections.
• Foreign investor flows into US equities before midterm elections-0.1% of US equity assetsAverage selling in the 3 months before the last 10 midterm elections.
• Foreign investor flows into US equities after midterm elections+0.5% of US equity assetsAverage increase in allocation in the 3 months after the last 10 midterm elections.
• S&P 500 2026 EPS forecast$340Goldman Sachs top-down forecast; bottom-up consensus is $353, and strategist consensus is $334.
• S&P 500 2027 EPS forecast$385Goldman Sachs top-down forecast; bottom-up consensus is $402, and strategist consensus is $386.
• S&P 500 year-end 2026 target8000Goldman Sachs target, implying about an 8% return.
• S&P 500 12-month target8300Goldman Sachs target, implying about a 12% return.
• Current S&P 500 NTM P/E20xIn the table, Goldman Sachs, bottom-up analyst consensus, and strategist consensus are all at 20x.
• Proportion of S&P 500 companies reported for Q2 202627%As of 2026-07-24, 135 companies had reported on an equal-weight basis.
• Proportion of reported companies with positive earnings surprise above one standard deviation in Q2 202670%Among reported S&P 500 companies on an equal-weight basis.

Impact & implications

In terms of investment implications, the report is more supportive of focusing on or holding US equity index volatility over the coming weeks, rather than betting on sector rotation driven by specific election outcomes. On stock direction, historical returns are usually limited before Election Day, while a decline in policy uncertainty after the election would be supportive of a recovery in returns. On rates, if the 10-year nominal yield rises to around 5% in the short term or the real yield rises to around 2.7%, it could pressure equities.

Risks

• Policy uncertainty continues to rise ahead of Election Day and suppresses risk appetite.
• 10-year Treasury yields or real yields rise rapidly, triggering pressure on equity valuations.
• Inflation and gasoline prices become focal points for voters and markets, affecting prediction markets and risk-asset sentiment.
• AI regulation becomes a bipartisan issue, potentially affecting AI-related stocks or thematic trades.
• The current state of extremely low constituent correlation may reverse, leading to a rapid rise in index volatility.
• The relationship between election probabilities and industries, factors, and thematic baskets is currently weak, so forcing trades on election outcomes may lack stable signals.

What to watch

• Changes in policy uncertainty indicators and market volatility ahead of the 2026-11-03 US midterm elections.
• Whether implied correlation among S&P 500 constituents rebounds from historical lows.
• Whether the 10-year US Treasury nominal yield approaches 5%, and whether the real yield approaches 2.7%.
• Inflation data, gasoline prices, and the importance of price issues in voter surveys.
• Changes in prediction-market probabilities for control of the House and Senate, especially the probability of a Democratic sweep.
• Whether AI regulation-related policy discussions affect technology and AI-themed assets.
• Progress of the Q2 2026 earnings season, breadth of EPS revisions, and S&P 500 earnings expectations.
• Changes in US equity allocations by mutual funds, ETFs, and foreign investors before and after the election.