Goldman Sachs strategists expect S&P 500 index volatility to climb as the U.S. midterm elections approach. Record-low correlations between individual stocks have held index swings down, but the bank sees macro issues taking over as earnings season winds down. History points to a flat index through Election Day and a recovery after it.
With the U.S. midterm elections three months away, investor attention is likely to shift increasingly toward the vote in the coming weeks, Goldman Sachs strategists say. Strategists led by Ben Snider wrote that in past cycles, economic policy uncertainty has usually risen in the August ahead of midterm elections and remained elevated in the subsequent few months — which, they argue, adds to the case for holding equity index volatility in the near term.
Record-low stock correlations have muffled index swings
Record-low correlations across individual stocks have been suppressing index-level volatility, the note said, even as volatility at the stock and factor level has surged. The AI trade and overwriting strategies are likely to keep weighing on those correlations.
But Goldman expects macro to reassert itself. The bank looks for "increased focus on macro issues including elections, geopolitics, and interest rate volatility" to push index volatility higher as earnings season winds down.
The index has historically stalled before midterms
Across 13 midterm election years since 1974, the S&P 500 has generated a median return of 0% from the start of August through Election Day. Returns have typically improved post-election, with a median gain of 6% in the three months that follow, the strategists said. Mutual funds and foreign investors have shown a similar pattern, generally pulling back on U.S. equity demand ahead of the vote before adding back exposure afterward.
Yields and prediction markets frame the risk
Meanwhile, real 10-year yields are at their highest level since 2023, and the real 30-year yield is nearing 3%. Strategists noted that equities typically struggle when interest rates rise by more than two standard deviations over a given period, a threshold that today equates to roughly a 50 basis point one-month move in 10-year yields.
On the election outcome itself, prediction markets point to an 85% probability that Democrats retake the House, with the Senate closer to a toss-up. That reduces the odds of a major legislative surprise, the strategists said, though they added that investors are watching the midterms for signals relating to the 2028 election cycle.
Few corners of the market have shown a consistent relationship with shifting election odds so far. The biggest moves in prediction markets this year have tracked energy prices rather than sector or factor performance, though Consumer Discretionary has shown a modest negative correlation to Republican odds. Inflation remains the dominant issue for voters, according to survey data cited in the report, with prediction-market odds of a Democratic sweep moving in tandem with gasoline prices in recent months.
Source: Investing.com
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