How to "Midterms Proof" Your Portfolio for 2026 VIEW IN BROWSER BY LUCAS DOWNEY, EDITOR, TRADESMITH'S ALPHA SIGNALS In just four weeks, the calendar will turn to a midterm election year. Are you ready? Ready or not – it’s bound to shake up the stock market, as you’ll see in today’s stroll down history lane. Midterm elections create a troubling pattern in the mega-cap stocks that have reigned supreme this past year and longer. Luckily, they also create an opportunity for other stocks to take pole position. And it appears the shift is well underway. So let’s explore where investors should focus to stay on track for their financial goals... during what could be a lackluster year for major indices in 2026. Midterm Election Years Underperform the Average This year, the bull market has been incredibly resilient as we’ve witnessed new high after high – nothing has been able to stall equities. But sooner or later, we’ve got to expect more digestion in the S&P 500. And this time around, there’s reason to believe that politics will be the culprit. Let’s rewind the tape. Back in January 2024, we studied how stocks perform in election years. Election cycles often have repeatable patterns. One of its biggest victims is that midterm years have by far the worst annual returns. If 2026 repeats the trend, it’ll return less than half what we got in 2025 – as the S&P 500 has had a paltry 3.4% gain in midterm election years going back to 1925. Below illustrates this beautifully: 
That’s 100 years of data – and some of the toughest midterm-election years have been the most recent ones. The last midterm year was 2022, when the S&P 500 dropped 19.4% due to rising rates caused by inflation. Prior to that, 2018 was a negative year with -6.2% performance. Other notable down years include 2002 when stocks suffered -23.4% and 1974 when the S&P collapsed -29.7%. The pattern is clear: Midterm elections crush index returns. But this doesn’t mean it’s time to break the bear suit out… From where I’m sitting, it’s merely a wakeup call to reset expectations and look outside conventional trends we’re all familiar with. If 2026 is going to be choppy, let’s see if history can help us determine a playbook by looking at midterm quarterly returns. Using data since 1980, stocks are slightly positive in Q1 with a 1.22% average gain. Q2 and Q3 are red on average with -2.4% and -1.68% returns respectively. The great news is Q4 is usually very green with average gains of 6%: 
If history is to repeat, expect modest gains in the first quarter, then modest downside follows in Q2 and Q3. Just don’t stay bearish for too long. Q4 has a tendency to blast off. So What’s an Investor to Do? Grab the Dividend Aristocrats For me, I believe we are on the cusp of a broadening market…where value-oriented areas can play catch-up to mighty tech. Keep in mind that the top 10 stocks in the S&P 500 represent 40% of the pie. I think we could see a scenario where those handful of stocks stay rangebound and other areas pick up speed. Why? Unlike the last midterm election (2022), we are in a rate-cutting regime. The Federal Reserve has been (slowly but surely) lowering interest rates – and the political pressure to pick up the pace is getting intense. That will favor dividend-rich groups like Health Care, Financials, Energy, Staples, Utilities, and REITs. The “Mag 10” AI stocks will hardly look so magnificent then: Some of them don’t pay a penny of dividends...others just nickels. Investors sitting in risk-free money market funds will start looking elsewhere for their income needs. In fact... they already are. Over the last month, we’re seeing dividend sectors lead the pack. Top performers are Health Care XLV +8.13%, Materials XLB +5.05%, Staples XLP +4.77%, Energy XLE +4.07% and Financials XLF +1.86%, as you can see below. The worst-performing sector is Technology XLK with -5.09% returns: 
Will these value/income sectors keep atop the leaderboard in 2026? Well, with President Trump’s new pick for Fed chair on his way in May... Don’t be surprised if they do. So with stock performance set to continue broadening in 2026, here’s an example of the kind of company you want to own. Last year, I discussed a dividend stalwart to keep on your radar, Walmart (WMT). The discount-retailer stock has been growing like a weed. At last measure, the stock is trading at an all-time high, up nearly 12% the last six months: 
What’s interesting about this $900 billion firm is the top-line revenue growth. In FY2025 sales reached $681B. Wall Street estimates peg FY2027 revenues at $746.7B. Diluted EPS ramped to $2.41 per share in FY 2025 and should hit $2.96 per share in FY2027. This is rock-solid for a consumer staples company focused on a profitable eCommerce business. When the bottom line is healthy, companies often share profits with investors in the form of dividends. Walmart is not only a consistent payer – it’s been raising its dividend annually for five decades. Its last hike of 13% now pays shareholders .235 per share each quarter. Even at all-time highs, it still yields more than any “Mag 10” stock. That’s a winning formula. There’s only one thing left to do: Inspect the company through Jason Bodner’s Quantum Score. Not only does it crunch the numbers on even more fundamental metrics than the ones I just mentioned for Walmart... Quantum Edge also makes sure the stock is technically sound. That involves gauging price momentum and whether the stock has enough big-money interest on Wall Street to sustain that momentum. So after all that, WMT’s overall Quantum Score of 87.8 out of 100 tells me all I need to know. It’s firmly in the buy zone: 
Use the time now as we approach 2026 to look outside the same few mega-cap tech stocks for other areas primed to excel. If we experience choppy action, look towards dividend-rich areas like health care and staples for leadership. Why wait to hear all about this rotation in the news... after it’s halfway done? This Quantum Edge buy signal on WMT is just one of the leaders TradeSmith software is flagging now – to keep you at the front of these trends. I’ll keep you informed about what future signal studies turn up here in TradeSmith Daily... And there’s also my Alpha Signals model portfolio with weekly update videos, exclusively for TradeSmith Platinum members. This week I hear you can upgrade to Platinum – as they’ve opened up a few last spots at the 2025 TradeSmith 20th Anniversary price. Go here for our CEO Keith Kaplan’s briefing on the big changes ahead. And I’ll see you on the other side of the velvet rope! Regards, 
Lucas Downey
Editor, TradeSmith’s Alpha Signals [Disclosure: Lucas Downey holds shares of Walmart (WMT) as of this writing.] In Case You Missed It 
As we move into our third decade as a company, expect sweeping changes ahead. We urge you to hear about what’s happening directly from our CEO first. Please take a moment to watch the important video Keith Kaplan made for you about it today. This change could impact everyone in the TradeSmith community. To get the details of what’s happening in 2026, click here. | 
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