Three-Month Countdown: Goldman Sachs Warns of Increased Volatility in U.S. Stocks Ahead of Midterm Elections, Historical Data Shows Near-Zero Returns from August to Election Day

According to Financial Intelligence APP, the latest report from Goldman Sachs points out that as investor focus shifts from corporate earnings to the 2026 midterm elections, the U.S. stock market may experience more turbulent movements in the coming three months. However, the bank also believes that the election outcome itself is unlikely to be the main driving force behind market performance.

The key takeaway for investors is that historical patterns show market volatility tends to intensify before election day, with equity returns remaining subdued. Once political uncertainty subsides, the market typically sees stronger performance. Goldman Sachs strategist Ben Snider believes that as the currently unusually low single-stock correlations give way to macro-driven trades focused on elections, interest rates, and geopolitics, options linked to broad equity indexes may become increasingly attractive.

In its latest “US Weekly Kickstart” report, Goldman Sachs notes that in the months leading up to midterm elections, policy uncertainty historically increases alongside market volatility. Since 1974, in midterm election years, the S&P 500’s median return from early August to election day has been about 0%, but in the three months following the election, it rebounded with a median increase of 6%.

The bank also found that investors tend to adopt a defensive stance ahead of midterm elections. U.S. mutual funds often increase cash holdings during the three months before the election, only to re-enter the market once results are confirmed. Similarly, foreign investors also tend to reduce their U.S. equity exposure before elections and add positions again once results are clear.

Goldman Sachs believes that current market structure further reinforces expectations for rising index volatility. The implied correlation among S&P 500 constituent stock options has dropped to the lowest levels in decades, suppressing overall index volatility even when individual stocks swing sharply. As earnings season comes to a close, Goldman Sachs expects investors will turn their attention to macroeconomic topics, including elections, inflation, and interest rates, increasing the potential for greater index swings.

Interest rates remain another key risk. U.S. Treasury yields have recently surged, with real 10-year yields hitting the highest since 2023. According to Goldman Sachs, historical evidence suggests that when Treasury yields rise unusually rapidly, equities often come under pressure. The bank estimates that if the 10-year yield rises by another 50 basis points over the next month, it would create a historically adverse environment for stocks.

Despite the market’s heightened focus on U.S. politics, Goldman Sachs does not believe the election outcome itself will significantly reshape market dynamics. Betting markets currently put the probability of Democrats winning House control at about 85%, while Senate control remains highly uncertain. As investors have broadly priced in these expectations, Goldman Sachs believes broader economic fundamentals, rather than election surprises, are the main source of volatility.

Instead, investors seem more concerned with the political landscape signals revealed by the midterm elections as they look ahead to the 2028 presidential election. Recent surveys indicate inflation remains the top concern for voters, while AI regulation has unusually become a bipartisan consensus issue—with more than 70% of respondents in one poll supporting some form of government regulation.

Goldman Sachs also found little sign of sector trades based on election odds. Over recent months, most sectors, investment factors, and thematic baskets have shown only weak or no statistical relationship with shifts in betting market probabilities. The consumer discretionary sector shows the strongest correlation with changes in election expectations, but the degree remains modest.

Outside the election outlook, Goldman Sachs maintains its constructive long-term view on the equity market. The bank continues to forecast S&P 500 earnings per share at $340 for 2026 and $385 for 2027, and maintains its year-end 2026 S&P 500 target at 8,000 points, with a 12-month target of 8,300 points.