Midterm election risks have not yet triggered volatility in US stocks; JPMorgan: VIX may rise in the coming weeks

According to Zhichong Finance APP, the U.S. midterm elections are one of the most closely watched major events in global financial markets for the remainder of this year, but signals from the derivatives market show that traders are not currently betting that the elections will bring drastic volatility to U.S. stocks.

Options market data indicates that as the November elections approach, implied volatility in U.S. equities remains relatively low. The forward curve of the Chicago Board Options Exchange Volatility Index (VIX) is significantly lower than prior to previous U.S. midterm elections.

The U.S. 2026 midterm elections will take place in November, during which all 435 seats in the House of Representatives and about one-third of the Senate seats will be up for election. A team of derivative strategists at JPMorgan led by Bram Kaplan pointed out that since the market views a high likelihood of political gridlock post-election, the macroeconomic and policy impacts of this midterm are expected to be relatively limited. This assessment is also reflected in S&P 500 options pricing, where the market is currently only factoring in a moderate election event risk premium.

Specifically, the options market expects that on November 4, after the voting ends, the implied volatility of the S&P 500 will be slightly above 0.8%, which is roughly in line with the expected volatility corresponding to the Federal Reserve's rate decision days just before the election.

This means that although the midterm elections are of high interest to investors, current pricing suggests traders do not consider them a risk event significant enough to trigger a sharp shake-up in U.S. equities. However, JPMorgan strategists note that, historically, U.S. stock market volatility often rises gradually in the months leading up to the midterms, typically peaking about a month before voting day and then retreating after the election. JPMorgan Asset Management's recent studies of historical data also show that midterm election years tend to be accompanied by higher realized volatility; however, in some years, such market turbulence was actually driven more by other factors such as monetary policy rather than the elections themselves.

It is noteworthy that the current VIX forward curve remains significantly below the levels seen prior to previous midterm elections, while investors are simultaneously facing a series of other macro risks, including market disruptions driven by artificial intelligence and inflation and economic risks triggered by higher oil prices due to the Iran war.

Therefore, JPMorgan strategists believe that although the options market's reaction to the midterms is muted for now, there is still room for volatility to rise in the coming weeks. They advise investors to monitor the potential for increased volatility before the election, as the VIX could repeat its historical pre-midterm upward trend, and other key macro risks may further intensify ahead of the election.