With the U.S. midterm elections now around three months away, political developments are likely to become a more important factor for investors.
Goldman Sachs strategists believe growing election uncertainty, geopolitical risks and changing interest-rate expectations could push S&P 500 volatility higher during the coming months.
Political Uncertainty Usually Rises Before Midterms
Goldman Sachs strategists led by Ben Snider said economic policy uncertainty has historically increased during August before midterm elections.
That uncertainty has often remained elevated for several months afterward.
According to the bank, this pattern strengthens the argument for maintaining exposure to equity index volatility in the near term.
Low Stock Correlations Have Limited S&P 500 Volatility
Correlations between individual stocks recently fell to exceptionally low levels.
This has helped keep volatility at the index level relatively subdued, even though individual stocks and investment factors have experienced much larger price swings.
When stocks move in different directions, their gains and losses can offset one another. As a result, the S&P 500 may appear stable even while significant volatility exists below the surface.
Macro Risks Could Push Index Volatility Higher
Goldman expects the artificial intelligence trade and options-overwriting strategies to continue limiting correlations between stocks.
However, broader macroeconomic concerns could eventually outweigh those effects.
As earnings season comes to an end, investors may focus more heavily on elections, geopolitical tensions and interest-rate volatility.
That shift could cause more S&P 500 companies to move in the same direction, increasing overall index volatility.
S&P 500 Often Stalls Before Midterm Elections
Historical performance suggests the stock market often struggles to advance before U.S. midterm elections.
Across 13 midterm election years since 1974, the S&P 500 produced a median return of 0% between the beginning of August and Election Day.
However, performance generally improved after the vote.
The index delivered a median return of approximately 6% during the three months following midterm elections.
Although historical results do not guarantee future returns, this pattern suggests political uncertainty may temporarily delay investor risk-taking.
Investors Often Reduce Exposure Before the Vote
Mutual funds and foreign investors have shown a similar pattern during previous election cycles.
These investors have generally reduced demand for U.S. stocks before midterm elections and increased their exposure after the results became clear.
This behavior may reflect a preference to avoid uncertainty rather than a negative long-term view of the U.S. market.
Rising Bond Yields Add Pressure on Stocks
Interest rates present another potential risk for the S&P 500.
The inflation-adjusted 10-year Treasury yield has reached its highest level since 2023. Meanwhile, the real 30-year yield is approaching 3%.
Higher real yields can make bonds more attractive compared with stocks. They can also reduce the present value of expected corporate earnings, particularly for highly valued growth companies.
Goldman noted that equities usually struggle when interest rates rise by more than two standard deviations during a given period.
Under current market conditions, that threshold would represent an increase of around 50 basis points in the 10-year Treasury yield within one month.
Election Markets Favor a Democratic House Victory
Prediction markets currently suggest an 85% probability that Democrats will regain control of the House of Representatives.
The outcome of the Senate election appears much less certain and remains close to a toss-up.
Goldman believes this outlook reduces the probability of a major surprise in legislative policy.
The strategists also noted that much of the recent political uncertainty has been connected to issues outside the legislative process.
Investors Are Already Looking Toward 2028
Although the midterm results will influence the balance of power in Washington, investors are also watching for signals about the 2028 presidential election.
The results could offer early evidence about voter priorities, party momentum and the political strength of potential future candidates.
However, few areas of the stock market have shown a consistent relationship with changing election probabilities so far.
Energy Prices Are Influencing Election Expectations
The largest changes in election prediction markets this year have been linked more closely to energy prices than to traditional stock market sectors.
Consumer discretionary stocks have shown a modest negative relationship with the probability of Republican victories. However, the connection has not been strong enough to establish a clear investment trend.
Inflation remains the leading concern among voters, according to survey data referenced by Goldman Sachs.
Prediction-market expectations for a Democratic sweep have also moved alongside gasoline prices in recent months.
This suggests energy costs and household affordability could play a central role in shaping both voter sentiment and market expectations.
Investors Prepare for a More Volatile Period
The combination of election uncertainty, elevated real bond yields and geopolitical risks could make the coming months more difficult for the S&P 500.
Historical trends suggest the market may struggle to deliver meaningful gains before Election Day. However, returns have typically improved once political uncertainty begins to fade.
Investors will therefore be watching bond yields, inflation, gasoline prices and prediction markets for signs that volatility is starting to increase.
