Goldman Sachs Anticipates Rising S&P 500 Volatility as U.S. Midterm Elections Approach

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With the U.S. midterm elections approximately three months away, Goldman Sachs projects that political developments will increasingly shape market sentiment, potentially driving higher volatility in the S&P 500 in the months ahead. Midterm elections determine control of both chambers of Congress, outcomes that can significantly alter the legislative and regulatory landscape on issues from fiscal spending to antitrust enforcement.

A team of strategists led by Ben Snider observed that historical patterns reinforce the expectation that economic policy uncertainty tends to intensify as election season draws nearer.

Election Uncertainty as a Catalyst for Volatility

"In past cycles, economic policy uncertainty has usually risen in the August ahead of midterm elections and remained elevated in the subsequent few months," Snider and colleagues wrote in a research note.

Goldman Sachs argued that this recurring pattern supports the case for maintaining exposure to equity index volatility in the near term.

The bank pointed out that unusually low correlations among individual stocks have helped keep overall index volatility muted, even though volatility at both the stock and factor levels has been significantly elevated.

However, Goldman expects this dynamic to reverse as corporate earnings season winds down. While artificial intelligence-related trading activity and option overwriting strategies continue to depress stock correlations, the bank believes that "increased focus on macro issues including elections, geopolitics, and interest rate volatility" will push index volatility higher.

S&P 500 Historical Performance Around Midterm Elections

Goldman Sachs also noted that the S&P 500 has historically posted only marginal gains in the period preceding U.S. midterm elections. Across the 13 midterm election years dating back to 1974, the index recorded a median return of 0% between the start of August and Election Day.

The picture has typically brightened after votes are cast. Returns have "usually improved post-election," according to the strategists, yielding a median gain of 6% over the subsequent three months. This pattern is consistent with the historical tendency for markets to respond favorably to reduced political uncertainty once electoral outcomes are settled.

Investor Flow Patterns Mirror Election Cycle Caution

Investment flows have historically echoed a similarly cautious stance heading into midterm elections, the bank said. Mutual funds and foreign investors have typically trimmed their exposure to U.S. equities prior to Election Day, then rebuilt their positions after the outcome is settled.

Goldman Sachs concluded that heightened attention to political developments, geopolitical risks, and interest rate movements could become increasingly significant drivers of market behavior as the November vote approaches.