Midterm Elections and the Stock Market: What History Shows | The Valor Brief #23

This is the 23rd edition of The Valor Brief, my weekly newsletter. This week covers two topics:

1. Midterms, Markets, and What History Says About Who Runs Washington
2. Your Index Fund Is More Concentrated Than You Think

Midterms, Markets, and What History Says About Who Runs Washington

Tuesday’s midterm elections flipped Congress. As of Thursday afternoon, Democrats are projected to win control of both the House and the Senate. A Republican stays in the White House. Starting in January, we’re back to divided government.

A few races are still being counted. CBS News projects Democrats will end up with somewhere between 251 and 268 House seats after flipping more than two dozen Republican seats. In the Senate, Democrats have won at least 54 seats, with Alaska and Mississippi still too close to call.

Some of you will be happy with that result. Some of you won’t. I’m going to stay out of the politics and stick to what the market did this week and what history says about the next couple of years.

Two very different days

Wednesday was a party. The Dow gained 1,569 points, or 3.03%, and closed at 53,356. CNN reported it as the Dow’s best day after a midterm election in 44 years. The S&P 500 rose 1.58%. The Nasdaq added 1.44%. Oil dropped more than 8% on expectations that the result puts more pressure on the administration to end the war with Iran, and the 10-year Treasury yield slipped from 4.95% to 4.90%.

Thursday took it back. The Dow fell 1,833 points, or 3.44%. The S&P 500 dropped 4.36%, its worst day since the tariff selloff in April 2025. The Nasdaq lost about 5.5% and closed in correction territory, more than 10% below its October 6 record.

Chip stocks led the way down. Nvidia fell 9.26%. AMD and Micron each lost more than 17%. Investors are worried that a Democratic Congress, along with growing local opposition to new data centers, could slow the AI spending that has carried this market for the past few years.

That’s what the short-term reaction to an election usually looks like. Fast, loud, and often reversed. History has a lot more to say over longer stretches.

The midterm year is usually the rough one

The market tends to follow a four-year rhythm tied to the presidential term. The second year, the midterm year, has historically been the weakest of the four.

• Since 1950, the S&P 500 has averaged a total return of about 8.3% in midterm years
• It finished positive in only 12 of those 19 years
• The average peak-to-trough drop during a midterm year has been about 17.5%

2026 has been easier than most. The deepest pullback this year was a little under 9%, and the low came on March 30. Even after Thursday, the index is still up for the year and sits roughly 6% below its October high.

The year after has been the strong one

This is the stat that gets passed around every midterm season, and it holds up. The S&P 500 has been higher 12 months after every midterm election since 1950. That’s 19 out of 19, with an average gain of about 16.6%, according to BNY. Fidelity’s data goes back to 1938 and shows gains 95% of the time.

The calendar year that follows a midterm is the third year of a presidential term. That’s what 2027 will be. Since 1950, year three has averaged a 20.8% total return and has never finished negative. The weakest was 2015, at 1.4%.

There are a few reasons people give for this. Uncertainty fades once the votes are counted. Businesses know who is writing the rules for the next two years. Presidents heading into a reelection year also tend to push for policies that support the economy. That last one may carry less weight this time, since President Trump can’t run for a third term.

One caution. Nineteen for nineteen sounds like a guarantee. It isn’t one. The 12 months after the 1986 midterm included the October 1987 crash, when the Dow fell 22.6% in a single day. The market still finished that stretch slightly higher, but it was a rough ride getting there.

Republican vs. Democratic presidents

I wanted to check the party numbers myself instead of repeating what gets shared online. I used annual S&P 500 total returns from 1950 through 2025, published by NYU professor Aswath Damodaran, and sorted each year by the party in the White House.

• Democratic president: 35 years, average return 15.4%, positive in 30
• Republican president: 41 years, average return 10.9%, positive in 30
• All years: 76 years, average return 13.0%

On the surface, Democratic presidents come out ahead. Before anyone screenshots that, look at what landed in each column.

Republican presidents were in office for 1973 and 1974, with the oil embargo and Watergate, when the market lost 14% and then 26%. They were in office for 2001 and 2002, after the dot-com bust and September 11th. They were in office for 2008 and the financial crisis, a 36.6% loss. On the other side, Barack Obama took office in January 2009, about seven weeks before the market hit bottom.

Economists Alan Blinder and Mark Watson studied a similar gap in economic growth under each party. They found that most of it came from things a president doesn’t control, like oil price shocks and productivity. Their word for a lot of it was luck.

Who controls Congress matters too

A president can’t do much without Congress. So I split the same 76 years by the president’s party and who controlled the House and Senate.

President	Congress	Years	Avg. annual return	Years positive
Democrat	Split	6	19.1%	6 of 6
Democrat	Republican	8	18.3%	7 of 8
Republican	Republican	9	16.2%	7 of 9
Democrat	Democrat	21	13.3%	17 of 21
Republican	Split	10	10.9%	7 of 10
Republican	Democrat	22	8.7%	16 of 22

A few things stand out to me.

Every combination has averaged a positive return. The market has made money under every version of Washington we’ve had since 1950.

The setup we’re heading into, a Republican president with a Democratic Congress, has the lowest average of the group at 8.7%. That’s the honest number and I’m not going to hide it. Look at what’s inside it, though. Those 22 years include 1973, 1974, and 2008, three of the worst years in modern market history. They also include 1958 (up 43.7%), 1975 (up 37.0%), 1989 (up 31.5%), and 1991 (up 30.2%).

Now narrow it to the years that match 2027 exactly: a Republican president, a Democratic Congress, and the third year of the term. That’s happened seven times, in 1955, 1959, 1971, 1975, 1987, 1991, and 2007. The market finished positive all seven times, with an average of 19.6%. Seven years is a tiny sample, so I wouldn’t lean on it too hard. It’s still worth knowing.

What I take from all of this

Each of those boxes holds somewhere between 6 and 22 years. That’s not much to build a plan on. Interest rates, inflation, earnings, and what investors are paying for those earnings have moved the market far more than any election.

Divided government usually means fewer big swings in policy. Fidelity’s Jurrien Timmer put it simply on Wednesday: “Markets like gridlock and that’s what we got.” Thursday showed that a new Congress can still shake up specific parts of the market, especially the companies most exposed to policy changes.

Here’s what I’m talking about with clients this week:

• Don’t make portfolio changes based on who won. The data doesn’t support it, in either direction.
• If Thursday made your stomach drop, look at how much of your portfolio is tied to tech and AI. The next topic walks through how.
• Keep money you need in the next 12 to 24 months out of the stock market.
• If your mix of stocks and bonds has drifted, rebalance on purpose instead of reacting to a headline.
• In a taxable account, positions that dropped this week may be worth a look for tax-loss harvesting before December 31.

Did this week’s swings make you want to change anything in your portfolio?

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Your Index Fund Is More Concentrated Than You Think

Ask most people what they own in an S&P 500 index fund and you’ll hear the same answer. “500 companies. I’m diversified.” You do own 500 companies. You just don’t own them in equal amounts.

The S&P 500 is weighted by size. The bigger a company’s market value, the more of your money goes into it. Right now the 10 largest companies make up close to 40% of the index.

What’s at the top

Here are the 10 largest holdings in SPY, the biggest S&P 500 fund, from its June 2026 filing:

Company	Share of the index
Nvidia	7.52%
Apple	6.59%
Alphabet	5.84%
Microsoft	4.30%
Amazon	3.62%
Broadcom	2.77%
Micron	2.02%
Meta	1.92%
Tesla	1.84%
Eli Lilly	1.47%
Top 10 total	37.9%

Weights move every day, so treat these as a snapshot.

For some perspective, the top 10 made up 22.8% of the index in September 2019. At the peak of the dot-com bubble in 2000, they were about 27%, according to Schwab and Bloomberg. Today’s level is higher than either.

Look at the list again. Nvidia, Broadcom, and Micron make the chips that power AI. Microsoft, Alphabet, Amazon, and Meta are spending enormous sums building the data centers that run on those chips. A big piece of the top of the index rises and falls with the same theme.

What Thursday showed us

When chip stocks sold off on Thursday, the whole index felt it. Nvidia fell 9.26%. At roughly 7.5% of the index, that one company knocked about 0.7 of a percentage point off the S&P 500 by itself. The broader chip index fell more than 12%.

None of this means these are bad companies. Most of them got to the top by growing earnings faster than almost anyone else. The question is how much of your own money depends on one group of companies doing well at the same time.

The overlap most people miss

The concentration usually gets worse once you add up every account. I see this all the time:

• An S&P 500 fund in the 401(k)
• A target-date fund in an old 401(k) that holds the same large companies
• A Nasdaq-100 or tech fund in a brokerage account, which leans even harder toward the same names
• A few shares of Nvidia, Apple, or Tesla bought years ago that have grown into a big position
• Company stock or RSUs if you work in tech

Each account looks reasonable by itself. Put them together and one company can end up as a much bigger part of your net worth than you ever planned.

How to check your own portfolio

1. Look under the hood. Every fund publishes its top holdings on its website. Write down the top 10 and their weights for each fund you own.
2. Add up the overlap. For your biggest names, multiply each fund balance by that company’s weight, then add any shares you own directly.
3. Set a limit for yourself. A common guideline is that no single stock should be more than about 10% of your total portfolio. Your number depends on your goals, your timeline, and how much risk you can stomach.
4. Rebalance in your retirement accounts first. Selling inside a 401(k) or IRA doesn’t trigger taxes, so that’s usually the cheapest place to bring things back in line.
5. Be careful in taxable accounts. Selling a stock with a large gain creates a tax bill. Spreading sales across tax years, gifting appreciated shares to charity, or pairing gains with losses can soften it.
6. Fill in what’s missing. Smaller companies, international stocks, and bonds all behave differently from big U.S. tech. Equal-weight index funds, which hold each company in the same amount, are another option some investors use.

I’m not telling anyone to sell their index fund. It’s still one of the best tools an everyday investor has. Just know what’s inside it, and make sure the rest of your accounts aren’t stacking more of the same on top.

Have you looked at what your largest fund actually holds?

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If there’s one financial decision you’re wrestling with (a mortgage, debt payoff strategy, investment question, budgeting challenge, or something else entirely), I’d be happy to help. I’ve set aside time for a complimentary 15-minute conversation focused on one topic that’s on your mind.

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This newsletter is for informational purposes only and is not intended to serve as specific financial advice. Valor Financial Planning does not provide tax, legal, or accounting advice. Consult with a qualified professional for personalized financial advice tailored to your unique circumstances. Investment decisions should be made based on your individual goals, risk tolerance, and financial situation. Past performance does not guarantee future results.