The market is nervous ahead of the mid-term elections, but historically, this event often indicates strong stock market performance—whether Washington sees a Republican landslide, a Democratic landslide, a split result, or a continuation of the status quo.

The S&P 500 typically performs well after mid-term elections and presidential elections. According to the analysis by CNBC of the S&P 500 returns after elections from 1980 to 2024, the average increase in the S&P 500 is 0.2% one day and one week after presidential and mid-term elections, and 1.1% one month later.

A year later, the S&P 500 rose by an average of 13.7% after the mid-term elections and by an average of 13.8% after the presidential elections. In 91% of cases, the returns were positive. Moreover, from 1982 to 2022, after each of the 11 mid-term elections, the S&P 500 index rose.

Short-term returns are less stable, especially after presidential elections; the average return after such elections is slightly negative both one day and one week later.

"There's always some anxiety before these elections," said Ryan Detrick, the chief market strategist of Carson Group, to CNBC. "But once it's over, it's a great relief, and the market usually performs well."

Market Preference Stalemate

However, the market usually prefers a divided government: the White House is controlled by one party, while at least one chamber of Congress is under the control of another party.

In 10 mid-term elections and 5 presidential elections, if no single party achieved a complete majority in governance, the S&P 500 averaged a gain of 15% after one year. In 15 of these cases, there was a positive return after one year. In contrast, after elections that resulted in control by a single political party, the S&P 500 averaged a gain of 11.5% per year.

Detrick said, "If there is a large-scale red wave or blue wave, the market actually doesn't like it, because it means that one side is spending too much, or one party has too much power."

If Democrats control Congress and Republicans hold the White House – which could happen in Tuesday’s elections – the market typically responds positively as well. CNBC analysis finds that during three mid-term elections (1986, 1990, and 2006), when Democrats controlled both chambers of Congress while a Republican president was in office, the S&P 500 fell by an average of 0.5% on the day of the election, but then rose by 3.4% a month later and by 10.9% a year later.

Of course, elections may also occur simultaneously with truly more important market factors.

Due to the bursting of the internet bubble, the S&P 500 fell by 22.1% in the year following the 2000 elections, which was the worst post-election performance since 1980. In contrast, the S&P 500 rose by 38.3% in the year after the 2020 elections, as the market rebounded significantly from the sell-offs triggered by the COVID-19 pandemic, making it the best post-election performance of that year.

According to Societe Generale, investors should remember that the Federal Reserve's policies and corporate profit cycles are ultimately more important than elections.

For example, after the mid-term elections in 2018, the stock market declined after Democrats regained control of the House of Representatives during President Trump's first term. More importantly, the Federal Reserve tightened monetary policy that year, raising interest rates four times, resulting in the S&P 500 falling by 6.2% for the whole year, although the market still rose by 11.7% a year after the elections.

The biggest variable at present is artificial intelligence, and whether the correction in tech stocks will continue. As long as the AI trend continues and the economy keeps growing, Detrick indicates that "this bull market is still likely to do well."

However, if the Democratic Party sweeps both the Senate and the House of Representatives, it is almost certain to put pressure on the infrastructure construction of AI, and may lead to further reductions.

The bond market is also tense, with global yields rising, and France is facing a minor debt crisis. If President Trump carries out his threat to launch more strikes, or if the situation in Iran escalates, a war in Iran could also worsen after the elections.

Jim Reid, the head of global macro and thematic research at Deutsche Bank, stated in a report: "Seasonality is not destiny, and the concerns surrounding Iran, AI, and France will not disappear mysteriously."

If history is any guide, we might see a Christmas market rally, as well as an increase in the S&P 500 after the mid-term elections. However, this market is still driven by AI; geopolitics, the Federal Reserve, and the bond market still hold the dominant position.

– CNBC’s Chris Hayes has contributed to this report.