• First, we took a look at US equity market and sector performance in 2H18 and 2H22, around the last two midterm elections. Conditions were choppy with two distinct drawdowns interrupted by a meaningful rally.
• Second, other things that jump out in our updates this week include shifts we’re seeing in our factor work, descriptions of a cautious consumer in our earnings call transcript analysis, the tendency of the stock market to perform well when IPO activity is ramping up, and the reasonable valuations we see across the major indices in the US.
If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: Midterms
• Midterm elections were one of the topics in focus on our recent trip to see investors in Australia week before last, and have regularly come up throughout the past year in discussions of risks to the outlook.
• And so upon our return, we spent some additional time looking at the past two midterm election years in terms of 2nd half equity market performance and the sector playbook around the event.
• In terms of second half performance for the broader market, conditions were choppy in the back half of both years, a contrast to the last two Presidential election years when stocks rose.
• Both 2H18 and 2H22 saw the S&P 500 peak in the early Fall (August or September), trough in October, peak in November, and trough again in December. The percentage moves were significant, as you can see on page 95.
• The good news was that these periods of volatility helped to usher in more durable lows that would hold into the new year.
ade policy also factored into:
• In terms of the sector playbook, outperformers during both drawdowns in both second halves were Consumer Staples and Health Care, while Technology and Consumer Discretionary underperformed. During each of the rebounds, Financials, Industrials, and Materials outperformed, while Communication Services, Consumer Staples, and Health Care underperformed. Details are on page 96.
• To be clear, we are not calling for this kind of turbulence in the months ahead, but we did find the exercise useful for thinking through tail risks, particularly regarding the timing of inflections.
Wrapping up with Takeaway #2: What Else Jumps Out
and Russell:
• Second, what we read the past week and a half as 2Q26 reporting season winds down. On the broader macro, companies described a dynamic and challenging backdrop citing geopolitical risk, inflation pressures, supply chain challenges, and low housing turnover, while also citing strength in AI, energy, manufacturing, and reshoring related end markets. On the consumer, one home improvement company stood out for their detailed description of how the consumer was cautious due to fuel, geopolitics, and other uncertainties. Value seeking behavior and weakness in demand for big ticket purchases were highlighted. IEEPA tariff refunds remained a point of discussion, with companies highlighting how it lowered COGS, offset other unplanned costs (i.e. fuel and transportation) or how the benefits were one off in nature. On AI, we continued to focus on comments from non-Tech companies on their use cases. In that context, one theme that stood out to us was how some consumer companies were using the technology to enhance the consumer experience. Productivity impacts remained in focus. One Tech company stood out for highlighting how their customers were reprioritizing existing budgets.
• Third, given headlines around IPO activity, we took a fresh look at the relationship between US IPO activity over time and stock market performance. Looking at the number of deal counts specifically we found that the stock market tends to go up while deal counts are elevated – it’s when the activity stops that the stock market tends to have a problem.
• Fourth and finally, valuations are fine. Given the angst that returned to financial markets markets this week, we think this is an important point to take note of.
• The forward P/E’s of the S&P 500 and Nasdaq 100 are sitting in the middle of their post COVID range, and this is also the case for the biggest market cap names in the S&P 500.
• Meanwhile, the Russell:
• August has been a down month in 4 of the past 10 years for the S&P 500, while September has been down in 5 of the past 10 years. If a pullback does occur, we suspect it won’t take too long for valuations to get back down to the low end of their post COVID range.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
