Uncommon truths: US stocks avoid the mid-term blues
The political calendar is busy, with important events due in the UK, France and Israel. However, attention will be focused on November’s US mid-term elections. Financial markets have tended to perform better in the year after an election than in the year of the election. US equities have performed strongly in the first half of 2026. Are markets looking forward to more congressional scrutiny or is it just the cycle dominating markets?
As a team, we believe that markets are driven by economic and policy cycles, rather than politics. However, there is a lot of political activity with some important elections in the offing.
In the UK, it is now virtually guaranteed that Andy Burnham will be installed as the new prime minister within weeks. As of Friday 10 July, he needed the support of only one more Labour MP to ensure he would be the only candidate in the race to become party leader and therefore prime minister. The special conference to select the new leader will take place on 17 July, after which there should be a rapid transition from Keir Starmer to Burnham. On the whole, UK financial markets have taken the change in their stride.
Also in the UK, Nigel Farage (leader of the Reform UK party that leads opinion polls with around 25% of the vote) has resigned as member of parliament for Clacton, with the intention of standing for re-election in what he calls a people versus the establishment contest (the media, parliamentary authorities and police are investigating his and Reform’s finances). All mainstream parties have declined to contest the election in order to frustrate the “people vs the establishment” narrative. Nevertheless, other candidates have presented themselves, the first being Count Binface but also including Laurence Fox (Reclaim Party) and independent candidates such as Ollie Granger and Luke Worley (neither of which has a political background). It is widely expected that Farage will win but whether it enhances or damages his reputation is to be seen.
In France, Marine Le Pen has been cleared by a judge to run as a candidate in the 2027 presidential election, though she will have to wear an electronic tag that will limit her ability to campaign freely (she is appealing against that stipulation). The first round of the election will be held on 18 April 2027, and July opinion polls suggest Le Pen will be well ahead of other candidates with around 34%-36% of the vote. However, that will not be enough to win outright, and a second round will be needed on 2 May, between the two candidates with the highest first round vote. It is hard to say who the other second round candidate will be (the choice appears to be between Edouard Philippe, former PM under Emmanual Macron, Jean-Luc Mélenchon, of the far-left France Insoumise party, and Gabriel Attal, also a former PM under Macron). Of those three, opinion polls suggest Philippe would have the best chance of defeating Le Pen.
Israel’s parliamentary elections must take place by 27 October 2026. In the aftermath of the 7 October attack on Israel, it was hard to imagine that Benjamin Netanyahu could once again become prime minister. However, some recent opinion polls suggest the ruling coalition could have a small majority after the election, but coalition negotiation outcomes are hard to predict.
Notes: Based on mid-term elections from 1938 to 2022. As of 10 July 2026.
Source: The American Presidency Project and Invesco Strategy & Insights
In reality, attention is likely to be focused on the US mid-term elections (due on 3 November). Figure 1 suggests there is a tendency at mid-term elections for the party of the president to lose seats. Given the narrow majorities held by the Republicans, it won’t take much of a swing to see a change of control.
This is especially the case in the House of Representatives, where Republicans currently hold 218 seats, the exact number needed for a majority (Democrats hold 212, with one independent and four vacancies, according to The House of Representatives Press Gallery). Jennifer Flitton, Invesco’s Global Head of Public Policy, reckons a net gain of only three seats (out of 435) will be enough for the Democrats to regain control (after allowing for the likely outcome of some upcoming special elections).
The Senate is a bigger challenge for the Democrats. According to 270toWin, Republicans currently hold 53 seats, with the Democrats on 47 (including two independents). The Democrats can regain control with a net gain of four seats, but with only 35 seats up for election (including two special elections) it is a bigger ask than it might appear. Jennifer feels that the Senate map is still more favourable to Republicans (given the balance of seats that are up for grabs).
Opinion polls are difficult to summarise, but the RealClearPolitics Generic Congressional Vote poll average shows the Democrats have a lead of 5.9 percentage points (48.4% versus 42.5% for the Republicans). The gap has narrowed since the end of May (around 8 percentage points) but is still wider than for most of the last year. Also, the RealClear Politics poll average for President Trump’s net job approval rating is -15.5 points (41.0% approve versus 56.5% disapprove). Again, the gap has narrowed since the end of May (-19.0%) but remains wider than for most of this presidential term.
Given all of the above, and despite redistricting activity that could help the Republican House outcome, Jennifer thinks there is a strong chance of the House flipping to the Democrats. She expects the Senate to remain under Republican control, though with a reduced majority. I think there is a chance the Senate could also flip (as per The Aristotle List of 10 surprises published on 11 January).
Either way, President Trump is likely to face more congressional scrutiny in the future. Figure 2 suggests that US assets have tended to perform better in the year after mid-term elections than in the year of elections (and better than on average). Maybe market fears about post-election gridlock are often misplaced. However, equity market performance so far in 2026 has been impressive, especially for small caps (S&P 600). Perhaps markets are welcoming the prospect of more checks and balances this time around. Or, just maybe, the economic cycle is dominating politics when it comes to market performance. Time will tell.
All data as of 10 July 2026, unless stated otherwise.
Note: Past performance is no guarantee of future results. Based on calendar year data from 1988 to 2026 (2026 H1 shows returns up to 30 June 2026) and shows average returns in Congressional mid-term election years since 1990, compared to the returns in the year after the election. “All years shows the average return in calendar years from 1988 to 2025. Govt = government bonds (based on ICE BofA US Treasury Index), IG = investment grade (based on the ICE BofA US Corporate Index), HY = high yield (based on the ICE BofA US High Yield Index). See appendices for a description of the asset classes used.
Sources: ICE BofA, S&P Dow Jones Indices, LSEG Datastream and Invesco Strategy & Insights.
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