After Q1 Earnings Season, US Stocks Enter Traditional Weak Period Ahead of Midterm Elections

The S&P 500 closed higher last Friday, completing an eighth consecutive week of gains and setting the longest winning streak since 2023. Despite geopolitical risks and rising global bond yields, the U.S. stock market continues to move upwards, but as June approaches, Wall Street strategists are warning investors to reassess summer risks.

U.S. Stocks Enter Traditional Weak Season in Election Years

Dow Jones Market Data shows that the summer during mid-term election years tends to be a weaker phase for the U.S. stock market. Historically, the S&P 500 has seen an average decline of 2.8% from the end of April to the end of September during mid-term election years. However, so far this May, the index has risen by 3.7%, significantly deviating from the historical seasonal pattern.

This weakness is not solely due to mild corrections; a few extreme bear markets have significantly impacted the historical mean. In 1930, the S&P 500 fell by more than 25%, in 1974 it dropped by 29.6%, and in 2002 it declined by 24.3%. Even without considering these three deeply falling years, the average gain during this period was only 0.006%, showing little clear directional benefit.

Currently, it is worth being vigilant as, although the U.S. stock market has been making new historical highs, volatility has not synchronized to retreat to extremely low levels. The Chicago Board Options Exchange Volatility Index (VIX) now stands at 16.7, and Nomura Securities analyst Charlie McElligott points out that this volatility level remains relatively high when the market is in a strong upward trend, indicating that a certain amount of risk is still accumulating underneath.

Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac and CEO of Hirsch Holdings, attributes the risks mainly to the mid-term election cycle. He analyzes that, as the market enters this phase, the focus will gradually shift from corporate earnings and macroeconomics to the political game of control in Congress, and investors' risk aversion will rise accordingly.

Hirsch believes that election years usually come with more intense party struggles, and the ruling party is prone to losing seats, which significantly suppresses market confidence due to uncertainty. According to the four-year cycle of the presidency, the second and third quarters of mid-term election years (approximately from April to September) have always been a traditional weak window for U.S. stocks. He judges that U.S. stocks are unlikely to enter a bear market this year but are more likely to exhibit a pattern of range-bound fluctuations with alternating gains and losses.

Policy Variables After Exiting the Earnings Season

Jay Hatfield, CEO of Infrastructure Capital Advisors, also warned of this seasonal risk. He pointed out that May and September have always been months when the U.S. stock market performs relatively weakly. After the concentrated release of earnings season benefits, investor attention will shift back to external risks such as the macroeconomy and geopolitics, and pessimistic sentiments are more likely to rise.

This feature is particularly evident this year. Strong earnings from the artificial intelligence and technology sectors have been the core support of the overall market; however, as the earnings period ends, issues such as Iranian conflicts, rising oil prices, and rebounding inflation have emerged one after another, also increasing the uncertainty of the Federal Reserve's monetary policy path.

However, Hatfield believes that mid-term elections do not necessarily bring only negative impacts. Should the situation lead to a divided Congress, it could actually constitute a long-term positive for the stock market. Currently, the Republicans control both chambers, with a Senate seat ratio of 53 to 47, and a slimmer majority in the House. The market widely expects the Democrats to have a better chance of taking the House, with the control of the Senate still suspenseful. In the event of a divided power between the two parties, the difficulty of advancing major tax reforms, large-scale fiscal spending, and regulatory policies will greatly increase. As corporate tax rates are already at a historical low, the risk of significant unfavorable policy changes will also decrease.

Hatfield franky stated that political stalemates often form a positive for the stock market. For U.S. stocks this year, historical seasonal patterns are for reference only, and the subsequent trend will ultimately depend on key variables such as the trajectory of inflation, Federal Reserve monetary policy, and