The S&P 500 (^GSPC 1.03%) has posted triple-digit gains in three consecutive years, a feat the benchmark index has accomplished only five times before. Wall Street expects the S&P 500 to extend its winning streak in 2026, but the index faces a headwind encountered once every four years: midterm elections.

The S&P 500 typically suffers a correction (i.e., a decline of at least 10%) during midterm election years, and the potential for stock market volatility is arguably more pronounced in 2026 because of sweeping tariffs imposed by President Trump. Here's what investors should know.

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The stock market usually drops sharply during midterm election years

Since its creation in 1957, the S&P 500 has consistently performed poorly during midterm election years. The benchmark index has returned an average of 1%, and it has suffered an average intra-year drawdown of 18%. In other words, history says the S&P 500 will fall 18% at some point in 2026 and the index will finish the year roughly unchanged.

Furthermore, 17 midterm elections have occurred since the S&P 500 was created in 1957, and the index fell into market correction territory during 12 of those years. That means the odds of a stock market correction in 2026 are approximately 70%.

Why does that happen? Midterm elections create uncertainty. The political party in power almost always loses seats in Congress, which leaves investors to wonder about the future direction of fiscal, trade, and regulatory policies. Financial markets respond very poorly to uncertainty.

However, that uncertainty dissipates rapidly after midterms, and stocks tends to rebound quickly. In fact, Carson Research says the six-month period following a midterm election (November through April) is the strongest period of the four-year presidential cycle. The S&P 500 has added an average of 14% during those six months.

Some investors may be tempted to sell their stocks today and buy them again in November. But attempts to time the market often backfire. In fact, famous fund manager Peter Lynch once warned, "Far more money has been lost by investors trying to anticipate corrections, or trying to time the market, than has been lost in corrections themselves."

The S&P 500 has performed very well during some midterm election years. It has returned as much as 38% and has delivered double-digit returns about 40% of the time. No one knows the future, but Wall Street expects 2026 to be one of the better midterm years because artificial intelligence spending is supporting the economy and the Federal Reserve is likely to lower interest rates at least once.

Wall Street expects the S&P 500 to increase 17% in the next year

In total, Wall Street analysts have over 12,800 ratings on stocks in the S&P 500. FactSet Research combines the median forecast on every stock to determine the implied target level for the entire index. That "bottom-up" methodology says the S&P 500 will increase to 8,146 in the next year, which implies nearly 17% upside from its current level of 6,976.

However, short-term market predictions are frequently inaccurate. During the past four years, Wall Street's median year-end forecast for the S&P 500 was incorrect by an average of 16 percentage points. How the benchmark index actually performs depends on financial results and investor sentiment.

S&P 500 companies in aggregate reported an acceleration in revenue growth and earnings growth in 2025, and Wall Street expects another acceleration in 2026. If financial results fail to meet high expectations, the stock market could decline sharply. That is especially true because valuations are elevated. The S&P 500 trades at 22.2 times forward earnings, a premium to the five-year average of 20 times forward earnings.

Here's the big picture: Wall Street anticipates a strong performance from the S&P 500 in 2026, but midterm election years have historically involved market corrections. Investors should mentally prepared themselves for that outcome. Limit stock purchases to your highest-conviction ideas. Sell any stocks you would feel uncomfortable holding through a drawdown. And consider building a cash position in your portfolio.