We examine industry returns over the last 100 years in unified and divided government environments.
Midterm elections seem to keep getting bigger. Each election cycle seems to come with more money pushing more commercials, news headlines, and content for pundits to discuss. This inevitably leads to discussion on how different results might affect equity market performance. We have discussed the tendency for US stocks to perform well after midterm elections. Markets do not like uncertainty, and there is always going to be some level of uncertainty surrounding a midterm election cycle. We often see increased volatility heading into the beginning of November in the second year of a presidential term. Then the three following quarters, starting in Q4 and continuing through the first half of the next year, show some of the highest average returns of all quarters in a typical four-year presidential term. The alleviation of uncertainty can remove headwinds, allowing further appreciation. This often plays out regardless of the result of the elections.
Some of those tendencies have played out so far in 2026. While we haven’t seen substantial volatility in the performance of the headline indices, there has been more turbulence underneath the hood in recent weeks. Many of our market breadth indicators fell to low levels before recent reversals higher. Even though growth-oriented equities have come under pressure in the last three trading sessions, we have seen breadth maintain positioning or improve. This paints a positive backdrop for further improvement in the weeks to come.
Still, the remaining question is where do we go from here? How might the results of the midterm elections affect equity market action moving forward? We understand that US equities often perform well after elections, but what areas will do the best? Those questions are impossible to answer with certainty. However, there are some interesting historical tendencies when we examine the performance of various US equity industries in unified and divided political environments.
We examined the historical performance of 10 broad domestic equity industries using data from the Ken French Data Library. This is the same Ken French from the famous Farma-French Model. This data was used as it ran from December 1926 through September 2026, allowing us to take our testing back significantly further than what is offered by the current GICs sectors. A breakdown of what is included in each of the ten industries can be found below.
Using these sectors, we then took the average returns of each portfolio in different forward return timeframes ranging from three months to 24 months. Our data begins at the start of each new Congress, which runs every two years beginning in 1927. These average returns are separated by the unification or division among the political parties in power of the executive and legislative branches. If the House, Senate, and White House all fall under the same political party, we have a unified government. Any of the three that differ from the other two results in a divided government. The results of each industry’s forward returns are below, along with some observations. Note that these industry indices are market-cap weighted and use total return data.
Near-Term Picture: 3-Month and 6-Month
Data from Ken French Data Library
The near-term three-month forward returns show that a divided government is better across the board. This could play out favorably moving forward, as current projections have at least one of the chambers of congress moving to a democratic majority. The largest spread favoring a divided government comes in the shops industry, followed by durables. The smallest spread is in utilities, which is the only spread that is close.
Looking to the six-month forward returns, we see that health improves to have the highest spread of any industry, followed closely by shops. Health having the highest spread favoring a divided government plays well into the current momentum picture, as healthcare is at the top of the DALI sector rankings. High technology shows the highest average return of all the industries in the six-month timeframe at a 13% gain.
Shops showing consistency in performing well during divided governments will be interesting to watch in the months to come. Of course, every market environment is unique, but the current market shows a very different inflation picture than we have seen in years. We continue to be faced with inflation that is generally above the Fed’s communicated target, which would could hurt shops more than we would have seen in prior cycles.
Long-Term Picture: 12-Month and 24-Month
Data from Ken French Data Library
The forward 12-month return spreads get tighter, as the lowest average return in either regime sits at 9%. High technology shows the highest average return one year out at a 20% gain. Telecom and health have the most favorable spread toward a divided government. Moving out to the longest term 24-month picture, durables show the highest average return, followed by high technology and health. The health industry also shows the most favorable spread again for the longest timeframe.
The most notable takeaways from all these timeframes are that markets perform well after midterms, and most industries do best in a divided government. The tendency for strong forward returns from healthcare across each timeframe could be a tailwind for the top-ranked sector in our DALI rankings in the months to come. Technology also seems to be less affected by the election results, showing generally high returns in either environment. Keep in mind that these historical tendencies are not meant to be predictive. It is important to remain objective and use relative strength as our guide to help navigate the market in the coming weeks.
