It is President Trump's second term. What might this signify for the stock market in 2026?

Stock Market Trends in the Second Year of a Presidential Term

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Historically, the second year of a U.S. president’s term has not been favorable for stock market performance.

Main Points

• According to Yale Hirsch, creator of the “Presidential Election Cycle Theory” and founder of the Stock Trader’s Almanac, the second year of a presidential term often brings weaker stock returns.
• Bank of America analysts recently cautioned that, based on historical patterns, investors may face market challenges this year, but could see a rebound in 2027.

Could President Donald Trump’s second term break the pattern of lackluster stock performance in a president’s second year? While historical data suggests a challenging period ahead, it’s important to remember that the past doesn’t always dictate the future.

The “Presidential Election Cycle Theory” suggests that U.S. stocks typically struggle during the first two years after a presidential election, with the second year often being the weakest. The latter half of the term, however, tends to see stronger gains.

Analysts attribute this trend to initial market reactions to new policies and the uncertainty leading up to midterm elections, which can weigh on performance early in a term. Conversely, efforts to boost the economy and political standing before the next election often support better returns in the final two years.

Implications for Investors

The seasonal nature of the U.S. election cycle has generally meant that the second year of a presidency is less favorable for investors. While this historical trend may cause concern, markets have been known to defy expectations—as seen during the first year of Trump’s second term.

Last week, Bank of America analysts highlighted that, if history is any guide, the market may underperform this year before potentially rallying in 2027.

Since 1940, the S&P 500 has averaged a 4.2% gain during the second year of presidential terms, compared to an approximate 9% annual average over the same period. Much of this underperformance tends to occur leading up to the midterm elections, though a late-year “Santa Claus rally” could help lift markets as the year ends.

Bank of America’s current projection for the S&P 500 at the end of 2026 is 7100, implying a return of about 4% for that year—significantly below the index’s long-term average.

However, the end of 2025 did not produce a Santa Claus rally, and the first year of Trump’s second term saw the S&P 500 climb by 16%, defying conventional expectations.

These outcomes highlight that broad market theories are not always reliable predictors, underscoring the familiar investment wisdom that past performance does not guarantee future results.