Why Political Gridlock Could Be Bullish for Stocks: Historical Data Points to Strong Midterm Returns

A divided U.S. government is returning to Washington, with Democrats controlling Congress while Republicans retain the White House. According to historical market data, this political setup has often coincided with strong stock market performance.
The S&P 500 has historically performed well following midterm elections. From 1974 onward, the index averaged a 5.7% gain in the three months after midterms, with positive returns 85% of the time. Over the following six months, the average return was 12.4%, with positive performance in every observed period.
Additional historical data from 1950 to 2025 shows:
- Midterm Novembers averaged a 3.0% S&P 500 gain, versus 1.8% in non-midterm Novembers.
- Midterm-year Q4 returns averaged 7.6%, compared with 4.2% in non-election periods.
- The following Q1 averaged an 8.2% gain, versus 1.1% in non-election periods.
- The 11 months following midterm elections averaged a 17.0% return, compared with 8.1% in other years.
The investment thesis is that divided government could limit sweeping policy changes, reducing uncertainty for businesses. However, political disputes, government shutdowns, debt ceiling negotiations, and congressional investigations could still trigger short-term volatility.
**Sectors and opportunities to watch:**
- **Clean energy:** ETFs such as $ICLN, $DEMZ, and $NANC could benefit from continued political support for clean energy initiatives.
- **AI infrastructure:** A potential pullback in semiconductor and memory stocks, including exposure through $SOXX and DRAM-related companies, could present opportunities for investors looking to buy the dip.
These are higher-risk satellite ideas rather than core portfolio holdings, according to the author.
The central argument is that political gridlock has historically been associated with favorable stock market returns, although past performance does not guarantee future results.