Signals to Watch in the U.S. Midterms

With Election Day a week away, our Head of U.S. Public Policy Research Ariana Salvatore and Wealth Management's Monica Guerra explain why the aftermath of the midterms may matter more to markets than who wins. Read more insights from Morgan Stanley.

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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley. Monica Guerra: And I'm Monica Guerra, Head of Policy and Geopolitical Strategy for Morgan Stanley Wealth Management. Ariana Salvatore: Today we're going to be talking about the upcoming midterm elections and what investors should be watching from both an institutional and individual investor perspective. It's Wednesday, October 28th, at 10am in New York. Well, Election Day is just about a week away. Investors are obviously increasingly focused on what a potential change in congressional control could mean for markets. And Monica, you and I are kind of grappling with this question through slightly different lenses. And that's why I thought it'd make sense to bring you in today. We both agree that what happens after the election is probably more important than the outcome itself. But let's start with the election backdrop. Your team has developed a Midterm Signal Monitor. What are the indicators telling us? Monica Guerra: Well, Ariana, affordability has really emerged as the defining issue for voters this cycle. Our monitor tracks four indicators positively correlated with midterm election outcomes: the generic congressional ballot, presidential approval, consumer sentiment, and gasoline prices. Democrats lead the generic ballot by about eight points, and presidential approval is 38.8 percent, just below the 40 percent historical reference point when the opposition political party tends to gain momentum. Now, consumer sentiment in October is the lowest of any October before a midterm election in the University of Michigan survey's entire history. And gasoline prices in September were up 37.6 percent from a year ago. So taken together, these signals point to a challenging environment for the incumbent party, really driven by affordability. Persistent inflation, elevated borrowing costs, and renewed energy price pressures tied to the conflict with Iran are all weighing on household purchasing power. But importantly, these are directional indicators, not necessarily a forecast of the election outcome itself. Now, Ariana, when you're looking at the potential outcomes from your perspective, how much do you actually expect to change? Ariana Salvatore: Well, I think that's the key question, right? Because our view has been that the midterms are unlikely to fundamentally change the direction of U.S. policy. And that's because a lot of the uncertainty that markets have dealt with since the beginning of 2025 has come from the executive branch rather than Congress. So, regardless of the outcome, we think things like tariffs, deregulation, immigration, geopolitics, export controls – all of those variables will remain important sources of policy uncertainty. Where congressional control matters more is on fiscal policy. So, a divided government would make new legislation harder to pass, and that could mean more contentious negotiations over things like government funding, the debt limit, and defense spending. So, for institutional investors, it's a little bit less about which party wins and more about what the composition of Congress means for the policy agenda going forward. As well as leadership's ability to really organize and corral different members of the caucus to effectively use their leverage around some of these negotiations. So, Monica, I imagine the questions that you're getting from individual investors may be a little bit different. Talk us through some of those. Monica Guerra: Yeah, they are. I think the biggest question is what the election can mean for an individual's portfolio. And history does offer us some interesting perspe