As U.S. equities hover near all-time highs, Wall Street's traditional midterm-election playbook is being put to an unusual test. Fidelity Investments, one of the world's largest asset managers, has highlighted that while stocks have historically tended to dip ahead of midterm elections and rebound afterward, the current environment defies the typical pattern that makes this strategy attractive.
Denise Chisholm, a quantitative strategist at Fidelity, cautions that the midterm cycle is not a hard-and-fast trading rule. "It isn't a trading rule," she emphasized, pointing instead to earnings performance and corporate investment as more reliable indicators. This distinction is particularly relevant now, as the S&P 500 closed Friday at 7,785.76, just 0.4% below its record high set on Thursday. The index slipped 0.17% on Friday but still posted a 0.4% weekly gain, marking its third consecutive week of advances.
Market Performance and Fund Flows
The broader market's resilience is reflected in the weekly performance of major indices. The Nasdaq Composite fell 0.28% on Friday but eked out a 0.1% weekly gain, while the Dow Jones Industrial Average declined 0.20% on the day and 0.6% for the week. The small-cap Russell 2000 bucked the trend, rising 0.51% on Friday and 1.1% for the week, bringing its year-to-date gain to 23.6%.
Investor positioning tells a nuanced story. U.S. equity funds recorded $2.58 billion in net inflows for the week ending August 12, according to LSEG Lipper data. Growth funds were the standout, attracting $8.78 billion—their best week since November 2024. However, technology sector funds saw $4.62 billion in outflows, ending a six-week streak of inflows. This divergence suggests investors are selectively adding risk rather than making a broad election-driven retreat.
Historical Context and Analyst Views
Fidelity's historical analysis, which begins at low points in earnings growth, found that similar conditions have led to positive 12-month returns nearly 88% of the time. Chisholm's research underscores that the midterm pattern is more of a historical tendency than a reliable signal. Goldman Sachs strategists note that in 13 midterm years since 1974, the S&P 500 has been flat from early August to Election Day on a median basis, but has gained a median 6% in the three months following elections. Barclays' Venu Krishna adds that technology, growth, and quality stocks have outperformed in eight of the last nine post-midterm cycles, suggesting any pullbacks could be buying opportunities.
Valuation and Economic Data Ahead
Valuations leave little room for error. The S&P 500 trades at nearly 20 times forward earnings, down from 22 times in January but above the roughly 19 times seen at the end of July. This premium multiple amplifies the impact of any disappointing data. Last week, softer-than-expected retail sales and elevated oil prices erased early Friday gains, though advancers still edged out decliners by a 1.1-to-1 ratio on the S&P 500.
Looking ahead, economic data will likely take precedence over political headlines. July housing starts are due Tuesday, and the Federal Reserve will release minutes from its July meeting on Wednesday. Retail earnings will also provide a gauge of consumer sentiment. Strong results could bolster Fidelity's argument that fundamentals matter more than election timing, while weak figures might reinforce a cautious stance into November.
Risks and Outlook
Historical election trends rely on limited data and shifting policy environments. Oil shocks, inflation, and high valuations could override seasonal patterns. As Chisholm advises, investors should focus on earnings and consumer spending rather than the calendar. The midterm pattern may explain some recent volatility, but it has not yet provided a clear reason to buy a dip that hasn't materialized. Patience may be the prudent approach as markets navigate an unusual confluence of record highs and political uncertainty.
