Artificial intelligence has been the key driver for the stock market this year, but another catalyst will start playing a greater role in how well the market does: the upcoming U.S. presidential election. Election Day is still more than 100 days away, yet the campaign cycle has already been historic. Former President Donald Trump took a lead in the polls and betting markets over President Joe Biden after a disastrous debate for the sitting commander in chief. Biden later dropped out of the race and endorsed Vice President Kamala Harris — making her the likely Democratic nominee. Since the June 27 debate between Biden and Trump, investors had begun pricing in deregulation and tax cuts, giving smaller market cap stocks a boost. However, uncertainty around those prospects has grown with Harris launching her campaign . Against this backdrop, CNBC Pro looked at how the stock market has fared during prior election years, which sectors tend to outperform — and how this year is already different. What typically happens In every election year since 1952, the S & P 500 has generated an average return of around 7%, per LPL Research . To be sure, Data from Comerica Wealth Management also shows that the only instances where the broad market index has experienced losses in election years were in 1960, 2000 and 2008 – three “open” elections where both parties offered up new candidates, as no incumbent was running. As for sectors, financials has seen the highest average annual returns in presidential election years at about 11%. Energy is a close second, with an average return of roughly 10%, Comerica data shows. Technology and materials, however, are not typically strong performers in election years. The former averages a return of more than 4%. Materials average a return of less than 2% in presidential election years. Health care is one of the worst performers during election years, as that sector tends to be impacted by political discussions around topics like lowering drug prices. Comerica data shows health care gains just under 6% during presidential election years. The sector has also lagged the S & P 500 in two of the last three presidential election years. To be sure, this has already proven to be a different election year than others. What’s different this time The biggest difference between 2024 and other presidential election years is the S & P 500’s massive year-to-date gains. The benchmark index is up a whopping 14% in that time, reaching all-time highs, thanks to enthusiasm around AI boosting profits. That gain is well above the 10%-11% average advance seen in presidential election years. “There’s more room for this to go, whether you look at strength from the first quarter or strength from the first half,” said John Lynch, chief investment officer at Comerica Wealth Management. Data from CFRA shows the S & P 500 averages a 4.9% gain in the second half of an election year after posting a gain in the first six months of the year. The benchmark rallied 14% from January to June. Another difference is how some of the sectors have performed. Tech, for example, is up 25% in 2024, outperforming its historical averages for a presidential election year. Health care, another historical loser in election years, is also up 10%. “When you look at individual sectors and companies, they navigate despite Washington,” LPL chief global strategist Quincy Krosby wrote. added, citing greater attention being given to the performance of Consumer Staples compared to Consumer Discretionary due to the impact of a presidential candidate’s tax proposals. “That’s why I say the market is more focused on the sectors as we move in closer and closer to the election.” 90-day rule Despite this year’s differences, the stock market has a strong history of predicting the presidential election winner during the three months prior to Election Day. “The 90 days leading up to an election really are very indicative as to whether or not the incumbent or the incumbent party can be successful,” said Comerica’s Lynch. “A declining market would suggest that the incumbent will not be victorious.” Lynch noted, citing data from Strategas, that in the election years from 1928 until 2020, performance of the S & P in the three months before the election predicted the result 83% accuracy. In these cases, positive S & P returns in the three months before the election occurred when the incumbent party won. B. Riley Wealth chief market strategist Art Hogan noted that investors who that shift their portfolio around “too much” to get ahead of that trend can end up getting disappointed. “If you look at polls, they change quite a bit,” he said, citing the 2016 presidential election as an example of how it looked like one candidate – namely, Hillary Clinton – was going to win leading up to Election Day that year. Meanwhile, on the Friday before that election, the S & P 500 posted a nine-day losing streak for the first time since 1980, dropping about 3% over that period. “If you set up a portfolio that aligned with what you thought her policies would drive in terms of economic activity, you likely were on the wrong side of that trade. The same thing can happen this year.”
