Positioning for the Midterm Rally in Financials and Communication Services
Nobody opens an investment memo hoping to be told the next two months will be unpleasant. We are going to tell you anyway, because it happens to be true and because it happens to be the entire setup for the trade we are about to describe. August and September have been the two weakest months on the calendar for the S&P 500 going back to 1950, and the pattern has not softened in the past decade — if anything, September in particular has gotten worse, not better, over the trailing ten-year window.
This is not a forecast. It is closer to a well-documented seasonal fact, the kind of thing that shows up so consistently across seventy-five years of data that it has earned its own nickname on trading desks. What makes it useful rather than merely depressing is what happens immediately afterward. The same data that shows August and September dragging also shows October, November, and December turning sharply higher, and turning higher by a wider margin in midterm years specifically than in any other year of the four-year political cycle.
We raise this not to tell you the next eight weeks will be comfortable, because they may well not be. We raise it because the investors who treat this seasonal soft patch as a reason to step back are, historically, stepping back right before the part of the calendar that has done the heavy lifting. Patience through a known, recurring dip is a very different thing from patience through genuine uncertainty, and this is the former.
Set the seasonal pattern aside for a moment and look specifically at midterm election years, because they behave differently from the other three years in the presidential cycle. Research published by both J.P. Morgan and BlackRock shows that U.S. stocks have historically produced an average return of roughly 12.4% in the twelve months following a midterm election. That figure holds up as a long-run average, not a guarantee for any single cycle, and both firms are careful to say it should inform a strategy rather than dictate one. We agree with that caveat. We are also not in the business of ignoring a pattern this consistent simply because it comes with a disclaimer attached.
The more granular version of this pattern comes from research compiled by Ken Fisher, tracking the frequency of positive quarterly returns across the second and third years of the presidential cycle going back to 1926. The frequency of a positive quarter sits at a modest 48% to 60% through most of Year 2 — essentially a coin flip stretched across several quarters of chop. Then, in the quarter containing the midterm election itself, that frequency jumps to 84%. It stays at 84% through the first two quarters of Year 3, dips modestly, and then climbs again toward the end of the year. This is not a single lucky quarter. It is a multi-quarter shift in the odds.
We want to be precise about where 2026 currently sits on this chart, because it would be easy to misread. The green 2026 line reflects real, live data, and it necessarily stops at the point we are at today — somewhere in the middle of Year 2. The purple and red lines are long-run historical averages that run the full length of the cycle. We are not claiming 2026 has already delivered the 84% outcome. We are claiming we are standing right at the edge of the window where, historically, the odds shift meaningfully in an investor's favor — and that the shift has not happened yet is the entire reason to be positioned ahead of it rather than after it.
The honest question a reader should be asking at this point is why any of this would be true. Markets do not rally because Americans feel warmly about their government in a midterm year — by most measures, the opposite is closer to reality. The explanation that has held up best over time has nothing to do with which party wins and everything to do with what divided government removes from the table.
A results-uncertain election, whatever its outcome, tends to produce a Congress less capable of passing sweeping legislation in either direction. That sounds like a dry, procedural detail. To markets, it is closer to a risk premium being taken out of the price. Corporations and investors do not need Washington to be productive to feel comfortable underwriting the next twelve to eighteen months of earnings. They need Washington to stop being a source of surprise. Gridlock, whatever else can be said about it, is remarkably good at removing surprise.
This is, admittedly, a less flattering story than the one most people want to hear about their government, which is part of why our headline says what it says. But an unglamorous explanation that has held up across nearly a century of midterm cycles is more useful to a portfolio than a flattering one that has not.
If the mechanism is reduced policy uncertainty rather than a specific legislative agenda, the sectors best positioned to benefit are the ones most sensitive to the cost of capital and the ones most exposed to regulatory and legislative overhang in ordinary years. That points us toward Financials and Communication Services.
Financials carry the argument we laid out in Memo #002 forward into a second, distinct catalyst. Earnings at the sector level have continued to strengthen on their own merits, and a reduction in policy-driven volatility — around banking regulation, capital requirements, and antitrust posture — removes one of the remaining sources of multiple compression that has kept the sector trading at a discount to where its underlying earnings arguably justify. Communication Services carries a similar logic from a different angle: the sector has spent much of the past two years under a low hum of regulatory scrutiny around content, competition, and platform power, all of which tends to quiet down, at least temporarily, once an election has actually happened and the legislative calendar clears.
Neither of these is a call on a single company. It is a call on two sectors that are structurally exposed to the exact variable — policy uncertainty — that midterm elections have a historical habit of resolving, one way or another, the moment the votes are counted.
We want to keep this section brief and clearly labeled as secondary, because it is conditional in a way the rest of this memo is not. Negotiations over the Strait of Hormuz remain unresolved as of this writing. A U.S. naval blockade has been reimposed following the collapse of an earlier ceasefire, and talks continue with Oman acting as an intermediary. There has been recent public optimism from U.S. officials that a deal could come together, though nothing is finalized, and we are not going to pretend otherwise.
Should those talks succeed and the Strait meaningfully reopen, the sequence we described in Memo #002 would apply again, and more forcefully. Oil retreating would ease inflation expectations. Cooler inflation expectations would relieve the pressure currently pushing the Fed toward a hiking bias rather than a holding one. A Fed under less pressure to tighten is, on balance, a friendlier backdrop for exactly the sectors we are already positioning in for entirely separate reasons. We would welcome this outcome, and it would make the case for Financials and Communication Services stronger still. But the midterm thesis in this memo stands on its own without it, and we are not asking our partners to underwrite a peace deal to believe in the trade.
Disclosure: Double Eleven Capital holds no position in the Financial Select Sector SPDR ETF (XLF) or the Communication Services Select Sector SPDR ETF (XLC) as of August 5, 2026. The partnership may hold positions in individual companies within the financial services and communication services sectors.
The next two months will likely feel like nothing is working. History suggests that is precisely the point at which positioning matters most, not least. We would rather be early to a pattern with this much data behind it than early to the consensus that eventually forms around it once the fourth quarter numbers are already in the rearview mirror.
