On The Street Monthly – What Midterm Election Years Tell Us
August 2026
What Midterm Election Years Tell Us
Inside: Why August and September Are the Toughest Months of Midterm Years, What Bank Stocks Are Signaling, and the Odds of a Fed Rate Hike.
Markets
What Midterm Election Years Tell Us
S&P 500, year to date
~+10%
After rallying, then pausing in June/July
Corporate earnings growth
~+25%
Outpacing the move in stock prices
Stocks rallied in April and May, then eased off slightly in June and July. Even with that pause, the market is up about 10% for the year while corporate earnings have grown about 25%. Profits are rising faster than stock prices, which means stocks are less expensive than they were in January. The question is whether the rally has more room to run.
History suggests the next stretch is the harder part. In midterm election years, August and September have been the weakest months for the S&P 500. The chart below shows returns for each month of the year, with midterm election years in dark blue.
Source: Carson Investment Research.
A pause here would fit that pattern. Stocks are up double digits, and this is the point in a midterm year when they often stall ahead of the election. Underneath, earnings are growing at their fastest pace since the pandemic, which in our view keeps the market on solid footing. The rest of this year’s gains may simply arrive later.
Financials
Banks Tend to Warn Us First
Prior all-time high (Feb 2007)
~$60.00
Not cleared again until late 2024
KBE price, today
$71.32
As of 8/4/2026
Bank stocks set a record high in February 2007 and did not clear it again until late 2024. They have now passed it several times in 2026. The chart below follows the SPDR S&P Bank ETF (KBE), a basket of bank stocks, from late 2005 through August 4, 2026. The two shaded bands mark recessions: the financial crisis in 2008 and the short COVID downturn.
Source: Y-Charts, State Street SPDR S&P Bank ETF (KBE) price.
Banks cracked first in this recession, well before the rest of the economy followed. Because banks lend to nearly every corner of the economy, their share prices tend to be an early read on how the economy is doing, and right now they are at record highs.
Fed Watch
Could the Fed Actually Raise Rates?
Odds of no change (350-375 bps)
43.3%
Current target rate
Odds of a hike (375-400 bps)
56.7%
More likely than no change at all
Coming into 2026, almost all the talking heads expected rate cuts. A few forecasts called for more and a few for fewer, but no one was predicting an increase. The Fed does not meet again until September, so there is still time for the picture to change. For now, though, investors see a rate hike as more likely than no change at all.
Target Rate Probabilities for 16 Sep 2026 Fed Meeting
Source: CME Group. Current target rate is 350-375 bps.
The chart above shows the odds for the September 16 Fed meeting. Investors are pricing in a 43.3% chance rates stay where they are and a 56.7% chance the Fed raises them. Two more inflation reports come out before that meeting, so those odds will move, but a rate cut does not look likely anytime soon.
Data
Market Snapshot
For the month ending 7/31/2026 (cumulative returns)
| 1-Month | 3-Month | YTD | 1-Year | |
|---|---|---|---|---|
| Dow Jones Industrial Average | 0.32% | 5.71% | 9.20% | 18.93% |
| S&P 500 | -0.13% | 3.89% | 9.41% | 18.15% |
| NASDAQ Composite | -3.20% | 1.93% | 9.17% | 20.13% |
| U.S. Mid Cap | 0.40% | 7.44% | 17.87% | 21.44% |
| U.S. Small Cap | -1.57% | 5.45% | 14.99% | 26.97% |
| 1-Month | 3-Month | YTD | 1-Year | |
|---|---|---|---|---|
| Nikkei 225 | -8.14% | 8.56% | 27.86% | 56.71% |
| Hang Seng | 13.13% | 0.42% | 0.99% | 4.49% |
| Shanghai Composite | -6.40% | -6.81% | -3.44% | 7.25% |
| FTSE 100 | 3.53% | 4.71% | 9.43% | 19.00% |
| DAX | 2.53% | 5.50% | 4.65% | 6.50% |
| 1-Month | 3-Month | YTD | 1-Year | |
|---|---|---|---|---|
| Corporate Bonds | -2.24% | -1.29% | -1.39% | 1.86% |
| Municipal Bonds | -1.58% | -0.60% | 0.21% | 5.00% |
| High Yield Bonds | -0.15% | 0.37% | 1.53% | 4.84% |
| Rate | |
|---|---|
| 10 Year Treasury | 4.75% |
| Fed Funds (Effective) | 4.21% |
| Inflation Rate | 3.50% |
| Unemployment Rate | 4.20% |
| Value | |
|---|---|
| WTI Crude Oil | $84.67 |
| Gold ($/oz) | $4,107.00 |
| U.S. Dollar Index | 99.91 |
| CBOE Volatility Index | 15.99 |
Source: FactSet Research Systems Inc.; YCharts, Inc.; U.S. Bureau of Labor Statistics. Corporate Bonds, Municipal Bonds and High Yield Bonds are presented via representative iShares ETFs (LQD, MUB, HYG). Past performance is no guarantee of future results.
In the News
Articles We’re Reading
- Amazon’s market cap tops $3T for the first time. Reuters
- JPMorgan says it will deploy over $750B into U.S. housing through 2035 to increase supply and homeownership. Reuters
- FAA certifies Boeing’s 737 Max 7, the smallest model in that aircraft family, after nearly a decade of delays. CNBC
- Qatar says a de-escalation proposal has been drafted and circulated to Tehran and Washington. Bloomberg
■ Did You Know?
The “dog days of summer” have nothing to do with dogs.
The phrase comes from Sirius, the brightest star in the night sky, which the Greeks and Romans called the Dog Star because it sits in the constellation Canis Major, the big dog. In late July and August, Sirius rises and sets at nearly the same time as the sun, and ancient writers assumed the two were combining forces to make the weather miserable. They were wrong about the cause but right about the timing. The heat comes from the tilt of the Earth, not from a star 8.6 light years away. Because our view of the stars shifts very slowly over the centuries, the dog days no longer line up with Sirius the way they did 2,000 years ago. The name stuck anyway, which is why we still use a piece of Roman astronomy every time we complain about August.
