The stock market has been treading water since the traditional midterm-election season began. History suggests investors shouldn’t necessarily be surprised.
Since 1974, the S&P 500 has gained an average of just 1.7% between Aug. 1 and Election Day during midterm years. The payoff historically has come after the votes are counted, when stocks have averaged gains of 5.7% over the following three months and more than 12% six months later.
But investors counting on another post-election bounce may want to temper their expectations, according to Michael Townsend, Schwab’s managing director of legislative and regulatory affairs, and Joe Mazzola, Schwab’s head trading and derivatives strategist.
Strong corporate earnings have helped power stocks higher this year overall, but Mazzola cautioned during Schwab’s WashingtonWise webcast today that some of the market’s traditional post-election rally may already have been “pulled forward.” Meanwhile, rising bond yields, persistent inflation and the possibility of a Federal Reserve rate hike are creating new obstacles for stocks.
The question for financial advisors is whether earnings can win the tug-of-war for the remainder of the year.
“I think the biggest driver has been the strength of the earnings backdrop,” Mazzola said
Companies aren’t merely beating estimates, he said. Revenue, profits and margins are rising together at rates rarely seen outside an economy emerging from recession.
Analysts expected roughly 25% year-over-year S&P 500 earnings growth during the most recent earnings cycle. Instead, Mazzola said, growth is tracking closer to 50%. Revenue increased 15%, while profit margins rose roughly 14% in the second quarter to their highest level since at least 2009.
Since 1974, the S&P 500 has gained an average of just 1.7% between Aug. 1 and Election Day during midterm years, according to Townsend. Remove 1982, when stocks surged more than 26%, and the average becomes negative.
This year, the S&P 500 has been flat since the start of August, while entering September up roughly 12% for the year.
The historical picture changes dramatically after Election Day. The S&P 500 has averaged a 5.7% gain during the three months following the past 13 midterms and more than 12% six months afterward. It has posted a positive six-month return after every midterm since 1974, Townsend said.
“Essentially, markets don’t seem to really care about the result of the election; they just care that the election is over,” Townsend said.
But Mazzola cautioned that some of the traditional post-election rally may already have been “pulled forward.”
One reason is the extraordinary concentration of earnings growth.
Nvidia and Micron generated 32% of S&P 500 earnings growth from 2025 to 2026, Mazzola said. Expand that to the top 10 contributors and they account for roughly 65% of the index’s earnings growth.
That doesn’t mean the rally has to end. But either those companies must continue carrying the market or earnings leadership needs to broaden.
For advisors with clients heavily exposed to mega-cap growth, Mazzola said diversification should mean more than owning additional stocks.
Financials, industrials, health care and energy could benefit if earnings growth broadens, while small caps have already outperformed the S&P 500 and Nasdaq this year. International equities could also reduce U.S. technology concentration because foreign indexes generally have less exposure to information technology.
But another risk is approaching.
The Fed meets next week and Townsend said futures markets are pricing in roughly a 60% probability of a rate hike—a remarkable reversal from January, when markets assigned essentially no probability to a 2026 increase.
War in Iran, tariffs and persistent inflation have transformed the outlook. Inflation has remained between 3% and 4% this year, Townsend said, while stronger-than-expected August hiring gives policymakers another reason to focus on inflation.
Mazzola said investors should pay less attention to whether the Fed raises rates than to why.
If policymakers hike because growth and earnings remain strong, stocks may absorb it. If the Fed tightens primarily to fight inflation, higher discount rates and tighter financial conditions could pressure growth stocks, small caps, real estate, utilities and highly leveraged companies.
“The market is trying to decide whether this is a growth-confirming hike or an inflation-fighting hike,” Mazzola said. “The first is manageable. The second is a little bit more concerning.”
Bond markets are flashing another warning.
The 30-year Treasury yield recently reached its highest level in nearly two decades amid concerns about inflation, tariffs and government debt. The national debt surpassed $40 trillion in August, Townsend noted, with federal interest costs projected to exceed $1 trillion this year.
Higher yields increase mortgage, auto and business borrowing costs while making bonds more competitive with stocks.
“I’m concerned, but I’m not alarmed yet,” Mazzola said.