With the 2026 midterm elections just around the corner, investors are wondering what comes next for the stock market.
Although the major indexes have held up relatively well, weakness beneath the surface, rising interest rates and renewed uncertainty surrounding AI stocks have made investors increasingly cautious.
But that uncertainty could also be setting the stage for a post-election stock market rally.
Historically, the stock market has often performed well in the months following midterm elections, as political uncertainty fades and investors turn their attention back to corporate earnings, economic growth and company fundamentals.
Could a similar pattern unfold this year?
Four Cabot analysts recently shared their perspectives on the market and the opportunities they’re watching as the midterms approach. And while each highlights a number of near-term challenges, all four believe there are reasons to remain optimistic about the months ahead.
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Pre-Midterm Market Weakness Could Set the Stage for a Fourth-Quarter Rally
According to Cabot turnaround investing expert Clif Droke, the stock market may be in a better position than it appears. Although the major indexes haven’t suffered especially steep declines, many individual stocks have experienced significant corrections.
That weakness, combined with the potential for seasonal strength following the midterm elections, could create an attractive environment for investors.
Clif explains:
As we head into the midterms, if you look at the major indexes, it doesn’t appear that there’s been much of a pullback. But below the surface, we’ve had something of an internal correction.
About 40% of large-cap stocks are down 25%, and 25% of S&P 500 stocks are down 40% from their highs.
I think that puts the market in a pretty good position once we get past this pre-midterm weakness and the typical fourth-quarter seasonal strength presumably kicks in.
Clif also sees potential opportunities emerging in sectors that are reversing periods of underperformance.
One of the areas of strength right now is healthcare. It’s one of the hottest-performing sectors and has done well for us at the Turnaround Letter.
While there were some excellent turnaround opportunities in healthcare heading into this quarter, it’s becoming more of a momentum trade.
Where I see turnaround potential heading further into this quarter and next year is aerospace and defense stocks, which are down significantly from this year’s highs.
Capital spending among defense contractors is expected to increase significantly next year as geopolitical activity presumably picks up, probably at some point after the midterms. That, in turn, should push inflation higher as well.
Clif also points to the massive investment in artificial intelligence as another potential catalyst for gold.
With AI hyperscaler bond issuance expected to double this year and next year, there’s a lot of concern about a potential credit bubble forming in the AI space.
That, in turn, could cause investors to seek higher-quality government bonds, such as U.S. Treasuries, which would push down Treasury yields. And that’s typically bullish for gold prices as well.
I see a lot of potential catalysts for higher gold prices.
For investors preparing for the post-election market, Clif’s outlook suggests that gold and gold mining companies could benefit from economic and geopolitical developments even if the broader stock market remains volatile.
Could Bearish Sentiment Fuel a Post-Election Stock Market Rally?
Cabot options expert Jacob Mintz sees another potentially encouraging development: Institutional investors are continuing to make bullish bets across a variety of sectors.
The basis of my system is tracking unusual options activity. I’m looking for where hedge funds and institutions are putting their big money to work.
The trend over the last couple of days, although [October 22 was] a little dicey, has been big call buying in AI names, banks, consumer stocks and restaurant stocks. There’s widespread call buying across many sectors, and that’s something I really like to see.
In terms of confidence, hedge funds and institutions are putting big money to work.
That buying activity stands in contrast to the recent performance of growth stocks, particularly those tied to artificial intelligence.
The AI trade is getting rocky. There are definitely some questions about growth stocks and AI.
Since the start of November 2025, consumer staples have outperformed the Nasdaq by nearly 10 percentage points. That’s a pretty shocking statistic. Everyone thinks AI stocks and semiconductors have been so hot, but in reality, there have been a lot of questions about those groups.
Jacob believes that skepticism could eventually work in investors’ favor, particularly if market conditions improve after the midterms.
I think that coming out of the election, once that decision has been made, and as we get closer to year-end, if the market can turn, there could be an epic chase higher.
Traders have been bearish, or at least marginally bearish, on these stocks and the market. If we start to see the stock market move higher and higher, investors could begin chasing those gains.
In other words, the same negative sentiment that’s weighed on growth stocks could help fuel a rebound if investors become more optimistic.
And that possibility isn’t limited to the largest technology companies.
Small-Cap Stocks Could Offer Opportunities Beyond the Major Indexes
Cabot small-cap investing expert Tyler Laundon sees reasons for cautious optimism as well.
Although higher interest rates have weighed on smaller companies, Tyler points out that small-cap stocks have actually held up better than many investors might realize.
Looking at the big picture, I’m cautiously optimistic about the market, but not bearish.
The economic data we’re continuing to get looks pretty good by and large. Certainly, there are some issues out there, but with third-quarter earnings season getting underway, I think we’re going to see attention shift away from macroeconomic events and back toward corporate growth and company fundamentals.
That’s a lot of what powered the strong market toward the end of the summer.
Tyler acknowledges that interest rates remain an important consideration, especially for smaller companies that tend to be more sensitive to borrowing costs.
Higher rates have definitely hurt the group. The S&P 600 SmallCap Index peaked back in August and has been trying to stabilize around its 200-day moving average.
But beneath the surface, the performance data shows that even though small caps have pulled back substantially since their August highs, they’re still leading year to date.
Small caps are up about 14.5%, versus roughly 12% for the S&P 500. So they’re still modestly ahead despite the sharp interest rate increase in August.
That relative strength suggests investors shouldn’t overlook smaller companies simply because of volatility.
Some of the market’s best growth stories are happening below the mega-cap level. Mega-cap stocks get all the news and attention, but there are a lot of other stories that aren’t being told.
It would be wrong to say that small- and mid-cap stocks aren’t working simply because their indexes took a dive in August and September when interest rates surged.
Higher financing costs and valuation multiples matter more for smaller companies. But we’re now seeing the 10-year Treasury yield pull back a little.
Rather than focusing exclusively on the direction of the broader market, Tyler is looking for specific characteristics that could help individual companies outperform.
What I’m looking for in small- and mid-cap stocks is pretty simple: improving fundamentals and identifiable growth catalysts that will be reflected in the share price when investors learn about them.
Ideally, we’re looking for operating leverage or cash generation so that as these catalysts take place, profit margins are expanding.
And, of course, we’re looking for constructive stock charts. You don’t simply buy a stock because the chart looks good, but that’s definitely an important factor.
The takeaway is that investors may be able to find compelling growth opportunities even if the broader market continues to struggle with uncertainty surrounding the election and interest rates.
Dividend Stocks Offer Income Amid Market Uncertainty
Not every investor is looking to capitalize on a potential rally in growth stocks. For those who prefer a more income-oriented approach, dividend-paying stocks and ETFs can provide another way to participate in the market while collecting regular income.
Cabot Money Club Chief Analyst Nancy Zambell closely follows investor sentiment and sees reasons for optimism despite recent market volatility.
I keep track of what investors are doing in the market and how they’re feeling about it.
Right now, I’d say most everybody is a little challenged in the short term, but over the long term, they’re still very bullish. So I’m happy to report that.
Nancy also favors diversified investments that provide income, including dividend-paying ETFs.
While dividend stocks and ETFs aren’t immune to market declines, they can offer investors a way to remain invested and collect income without depending entirely on rising share prices.
And with uncertainty surrounding the midterm elections, that could be an appealing alternative for investors looking to balance growth opportunities with income.
4 Investment Opportunities for the Post-Election Market
The 2026 midterm elections are approaching, and the market backdrop is decidedly uncertain.
But, as highlighted by our analysts, there are reasons for optimism. Internal market weakness could give way to seasonal strength, bearish sentiment could reverse, improving corporate earnings could support individual stocks, and income investments could remain in favor.
While a post-election stock market rally may not be guaranteed, historical post-election trends favor the bulls, as do end-of-year seasonal patterns, but there will undoubtedly be winners and losers, however the market shapes up after midterms.
That’s why identifying the right opportunities is important.
In our October 22 webinar, 4 Stocks to Maximize Profits in a Post-Midterms Market, Clif Droke, Jacob Mintz, Tyler Laundon and Nancy Zambell go beyond their broader market outlooks to reveal four specific investment opportunities they’re watching for the months ahead.
Whether you’re looking for growth opportunities, turnaround candidates, income investments or ways to capitalize on changing market sentiment, you’ll hear their individual strategies and the reasoning behind their recommendations.
Watch the October 22 Webinar: 4 Stocks to Maximize Profits in a Post-Midterms Market
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