The U.S. stock market is entering a historically stronger stretch of the midterm-election cycle, but the next leg of the rally may have less to do with November’s vote than with which parts of the market participate.
Carson Group data covering S&P 500 returns from 1950 through 2025 shows October has been the strongest month for stocks during midterm years, with an average 3% gain and positive returns in 73.7% of those years, according to Fortune. November has averaged a 2.7% advance, rising 78.9% of the time. Together, the two months have produced an average 5.7% gain.
That historical setup is colliding with a very different question for 2026: what would actually drive such a rally?
Citi told investors this week that the November midterm elections are likely to have limited impact on S&P 500 fundamentals, regardless of the outcome, noted Investing.com. The bank sees potential effects emerging more at the sector level, particularly if Democrats gain control of both chambers.
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Watch the AI trade
That puts semiconductor ETFs such as iShares Semiconductor ETF (NASDAQ:SOXX) and VanEck Semiconductor ETF (NASDAQ:SMH) at the center of the story.
Investing.com cited Citi saying that semiconductors could be more sensitive to election-related policy changes because of potential AI legislation, although it sees limited odds of policy derailing the broader AI trade.
If October produces another broad market advance, continued strength in semiconductor ETFs would suggest the AI trade remains a key engine of the rally.
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The Bigger Test Is Breadth
The more revealing signal could come from the Invesco S&P 500 Equal Weight ETF (NYSE:RSP).
RSP removes much of the mega-cap concentration embedded in traditional S&P 500 ETFs such as State Street SPDR S&P 500 ETF Trust (NYSE:SPY). Recent trading has shown that distinction matters: the S&P 500 has been supported by large-cap technology while equal-weight exposure has lagged. MarketWatch recently reported that RSP remained 4.6% below its record even as the cap-weighted index approached one.
A stronger RSP alongside the S&P 500 would point to improving market breadth. If the index rises while RSP continues to lag, the rally would remain concentrated in the market’s biggest names. A stronger October-November period accompanied by improving RSP performance would indicate that the seasonal rally is spreading beyond the market’s largest names.
State Street Consumer Discretionary ETF (NYSE:XLY) offers another test. Citi identified the sector as the weakest performer during the current term, citing tariff and gasoline-related pressures. A recovery in XLY would therefore offer evidence that some of the sectors facing economic pressure are beginning to participate in the market advance.
The calendar may be turning favorable for stocks, but ETFs could reveal whether a late-year S&P 500 rally is an AI-led extension, a broadening market move or something in between.
Photo: gguy on Shutterstock
