U.S. midterms: Breaking down expected impact on equities

U.S. equities could face increased political risk ahead of the Nov. 3 midterm elections, with Citi saying historical patterns point to weaker performance into the vote followed by a recovery as election uncertainty fades.

Citi said midterm election years have historically produced the weakest equity performance of the four-year presidential cycle. The bank expects an election-related risk premium to build before voting, typically beginning about 50 business days ahead of the election and peaking in the weeks before it.

Citi's analysis suggests the main equity impact could come from uncertainty rather than the election result itself. Stocks have historically sold off ahead of midterms as investors price political risk, before staging a relief rally into year-end as that uncertainty diminishes. The bank said this pattern has occurred regardless of the eventual election outcome.

A shift toward divided government could also affect markets through fiscal policy expectations. Citi said divided Congresses have historically been supportive for bonds because political gridlock reduces expectations for major fiscal stimulus or sweeping legislation, potentially influencing the broader risk-asset backdrop.

The bank cautioned that the current cycle has additional complications, including a large U.S. fiscal deficit and debt-ceiling negotiations expected in 2027. Those factors could limit the extent to which historical election patterns translate into market moves this time.