Three-month countdown: Goldman Sachs warns of increased volatility in U.S. stocks before the midterm elections, with historical data showing returns from August to voting day nearly approaching zero

According to the latest report from Goldman Sachs, as investors shift their focus from corporate earnings to the midterm elections in 2026, the U.S. stock market may face more turbulent trends in the next three months. However, the bank also believes that the election results themselves are unlikely to be the main driving force behind market performance.

For investors, the core insight is that historical patterns indicate increased market volatility and lackluster equity returns in the months leading up to election day, while markets often experience stronger performance after political uncertainty dissipates. Goldman Sachs strategist Ben Snider believes that as the currently unusually low stock correlation gradually gives way to macro-driven trading around elections, interest rates, and geopolitical factors, options linked to broad market indices may become increasingly attractive.

In its latest "U.S. Weekly Kickoff" report, Goldman Sachs pointed out that historically, policy uncertainty rises in the months leading up to midterm elections, with stock market volatility also increasing. Since 1974, during midterm election years, the median return of the S&P 500 index from early August to election day has been around 0%, while it rebounds in the three months following the election, with a median increase of 6%.

The bank also found that investors tend to adopt a defensive stance before midterm elections. U.S. mutual funds often increase cash holdings in the three months leading up to the election and re-enter the market after the election results are determined. Similarly, foreign investors tend to reduce their exposure to U.S. stocks before the election and increase their positions once the results are clear.

Goldman Sachs believes that the current market structure further reinforces expectations of rising index volatility. The implied correlation of options among S&P 500 constituents has fallen to its lowest level in decades, suppressing overall index volatility, even as individual stocks experience significant fluctuations. As earnings season comes to a close, Goldman Sachs expects investors to shift their focus to macroeconomic issues, including elections, inflation, and interest rates, which increases the likelihood of greater index volatility.

Interest rates remain another key risk. U.S. Treasury yields have recently surged, with the real 10-year yield reaching its highest level since 2023. Goldman Sachs stated that historical experience shows that when Treasury yields rise unusually quickly, the stock market often comes under pressure. According to the bank's estimates, if the 10-year Treasury yield rises by about 50 basis points within a month, it would create a historically unfavorable backdrop for the stock market.

Despite the market's heightened attention to U.S. politics, Goldman Sachs does not believe that the election results themselves will significantly reshape the market landscape. The betting market currently estimates an approximately 85% probability that the Democratic Party will gain control of the House of Representatives, while the Senate remains uncertain. Since investors have largely priced in this expectation, Goldman Sachs believes that broader economic fundamental developments, rather than unexpected election outcomes, are the main sources of volatility.

Instead, investors seem to be more focused on the political landscape signals revealed by the midterm elections as they move toward the 2028 presidential election. Recent surveys show that inflation remains the most concerning issue for voters, while AI regulation has rarely become a bipartisan consensus topic, with over 70% of respondents in a poll supporting some form of government regulation.

Goldman Sachs also found that there are few signs of trading based on election odds across various industry sectors. In recent months, most sectors, investment factors, and thematic baskets have shown weak or no statistical correlation with changes in betting market probabilities. The consumer discretionary sector has the strongest correlation with changes in election expectations, but the degree remains moderate Beyond the election outlook, Goldman Sachs maintains a long-term constructive view on the stock market. The firm continues to forecast earnings per share for the S&P 500 index to be $340 in 2026 and $385 in 2027, while keeping the target level for the S&P 500 index at 8,000 points by the end of 2026 and a 12-month target of 8,300 points