Stovall: Midterm Year Q4 Delivers 5.5% Average Gain

CFRA's chief investment strategist Sam Stovall highlighted that the average gain in the fourth quarter of a midterm election year is roughly 5.5%. He recommended that investors maintain their positions in the sectors that performed best in the third quarter.

Stovall gave these comments on CNBC's "The Exchange" on Monday amid market pressure. The S&P 500 ended that day 0.77% lower at 7,683.69, with Treasury yields rising.

Stovall: Midterm Q4 Historically Rewards Q3 Leaders

According to Stovall, the S&P 500 has historically advanced roughly 5.5% during the final quarter of a midterm year. On 75% of occasions when the third quarter was positive, the fourth quarter also rose.

The current year appears to meet that condition. As per CNBC figures, the benchmark is up over 2% this quarter and over 12% for 2026. The quarter ends on Wednesday, though.

The second and third quarters of midterm years usually see weak performance. Stovall noted that some investors questioned if the current rally was pulling gains from Q4. He dismissed that idea. Instead, he urged sticking with the sectors that led during Q3.

"following a strong Q3, you want to let your winners ride."

Sam Stovall, CFRA's chief investment strategist, told CNBC.

Conversely, if the third quarter is weak, the strategy reverses. Stovall said that in that scenario, investors should purchase the three sectors that performed the worst.

Low-Debt Sectors Led Q3 Performance

Stovall linked the outperformance to corporate finances. Industries with the smallest net-debt-to-EBITDA ratios fared best, as investors shifted money into them amid concerns over climbing interest rates.

The top-performing groups were energy, healthcare, technology, and communication services. In contrast, industrials, real estate, and utilities were the weakest.

Stovall noted that technology alone accounts for nearly 40% of the S&P 500's total market capitalization. Including communication services pushes that share to roughly 50%.

He also noted that rising oil prices increase the value of proven reserves for companies like Exxon and Chevron.

Climbing rates and oil prices have weighed on equities. The 10-year Treasury yield hit 5.23% temporarily on Friday, the highest level since June 2007, according to Zacks. The interview host pointed out that the yield was at 3.99% in late February.

Stovall remarked that first-quarter performance had already signaled inflation, interest rates, and oil as issues for 2026. Nonetheless, he said the dominance of low-debt sectors could continue into Q4 unless short-term easing occurs.