S&P 500, Kicking Off Midterm Election Rally?...Focus on 3 Major ETFs to Shake the Market

▲ U.S. Stock Market, S&P 500, Dollar (USD)/AI Generated Image

As the U.S. stock market approaches the midterm election cycle, historically the strongest seasonal bullish period, investors' attention is focused on key Exchange Traded Funds (ETFs) that will determine the actual sustainability of this rally.

According to financial news outlet Benzinga on September 27 (local time), an analysis of S&P 500 index returns from 1950 to 2025 by Carson Group showed that October, in midterm election years, recorded an average gain of 3%, making it the strongest performing month. During this period, the index closed higher in October 73.7% of the time. The following November also rose by an average of 2.7% with a 78.9% probability, showing a combined average gain of 5.7% over the two months.

However, an analysis suggests that the key issue for the fall market in 2026 depends less on the election results themselves and more on which sectors will drive the market. Citi stated in a client memo, “The impact of the November midterm election results on the fundamentals of the S&P 500 index will be limited,” adding, “Policy ramifications are likely to vary by sector rather than across the entire index.” In particular, it pointed out that legislative movements related to artificial intelligence could increase the policy sensitivity of the semiconductor sector, but are unlikely to disrupt the overall AI trade environment. Accordingly, the sustained stock performance of iShares Semiconductor ETF (SOXX) and VanEck Semiconductor ETF (SMH) is considered the primary test to determine the core driving force of the rally.

The Invesco S&P 500 Equal Weight ETF (RSP) is identified as a benchmark to indicate whether warmth is spreading across the overall market. Unlike SPDR S&P 500 ETF (SPY), a representative market-cap weighted fund, RSP is designed to exclude the concentration risk in mega-cap tech stocks. Recently, while large tech stocks have led the index's rise, RSP has remained 4.6% below its all-time high, showing a lagging trend. If RSP shows a concomitant strong performance during the index's ascent after October, it can be evaluated as a healthy rally with a broadening market base. However, if RSP's sluggishness continues, it is pointed out that the rally may remain limited to a few large-cap stocks.

The Consumer Discretionary Select Sector SPDR Fund (XLY), which includes economically sensitive consumer discretionary goods, is also a key observation point. Citi explained that the consumer discretionary sector recorded the weakest performance during this term due to tariff and oil price burdens. If a rebound in XLY is confirmed during this period of seasonal tailwinds, it will be strong evidence that even marginalized sectors, which have been under economic pressure, are participating in the market's ascent.

[Article Key Summary]

-October and November in midterm election years historically showed the strongest bullish period, with an average index rise of 5.7%.

-Confirming whether the momentum of the AI rally is sustained through the performance of semiconductor ETFs (SOXX, SMH) is a prerequisite.

-The rebound of the Equal Weight ETF (RSP) and Consumer Discretionary ETF (XLY) is a critical turning point to gauge whether the market expansion goes beyond the dominance of a few tech stocks to the broader market.

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