:max_bytes(150000):strip_icc()/GettyImages-2189594743-f97ab1eea30c45c69e7f6c7c1bd9e6e6.jpg "It’s President Trump’s Second Year. Here’s What That Could Mean for Stocks in 2026.")
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Key Takeaways
- The second year of a president’s term can mean comparatively bad news for stocks, according to the “Presidential Election Cycle Theory” coined by Stock Trader’s Almanac founder Yale Hirsch.
- Bank of America analysts warned clients this week that historical returns would suggest some pressure this year before a stronger 2027.
Could the second year of President Donald Trump’s second term buck theories suggesting headwinds for stocks? The data points to the likelihood of tough times ahead—but history doesn’t tell the whole story.
The second year of a presidential term tends to be the weakest of the four-year cycle, if the “Presidential Election Cycle Theory” is to be believed. The theory, coined by Stock Trader’s Almanac founder Yale Hirsch, holds that U.S. stocks tend to perform relatively poorly in the first year following a presidential election, with an even weaker second year, before a stronger second half of the term.
Early reactions to new policies aimed at fulfilling campaign promises, along with political uncertainty heading into midterm elections, have been posited as explanations for trends pointing to weaker performance in the first half of a term. Efforts to shore up the economy and gain influence ahead of the next election are typically seen as helping returns in the second half.
Why This Matters to Investors
Seasonality in America’s election cycle hasn’t historically favored the second year of a president’s term. That history might worry some investors, though markets could defy the trend—as they did in the first year of President Trump’s second term.
Bank of America analysts warned clients last week that historical returns supporting the theory would suggest market underperformance this year, before likely giving way to a stronger 2027.
Since 1940, the S&P 500 has risen an average of 4.2% in the second years of presidential terms, compared to an average annual gain of about 9% over the full period, the analysts observed. Most of that relative pressure could come heading into midterms, the analysts said, even with the possibility that the fourth quarter of 2026 could bring a Santa Claus rally, lifting markets to close out the year.
The bank’s current target of 7100 for the S&P 500 at the end of 2026 would suggest a roughly 4% return for the year, well below the benchmark index’s long-term average.
Then again, the end of 2025 failed to deliver a Santa Claus rally for investors—and the first year of President Trump’s second term proved to be a relatively strong one for U.S. markets, with the S&P 500 logging a 16% gain.
Both outcomes defied broad market theories, reinforcing the importance of another well-known market adage that past performance does not guarantee future results.
