Wealth Management

2026 Midterms: Seven Questions That Matter for Markets

Oct 27, 2026

The midterms could reshape Washington—but what could they mean for your investments? Get the answers to seven key questions about policy, markets and what comes next.

Author
Monica Guerra, Head of U.S. Policy and Geopolitical Strategy, Morgan Stanley Wealth Management

Key Takeaways

  • Democrats remain favored to regain the House, while Morgan Stanley now views the Senate as a toss-up with a slight Democratic edge.
  • A divided government could limit major legislation, but executive actions and congressional hearings and investigations may still affect markets.
  • Inflation, economic growth and corporate earnings are likely to matter more for broad market performance than the election outcome.

With the midterms fast approaching, I’ve been traveling the country talking with clients about the election and their investments. Across more than 25 cities in 13 states and Washington, D.C., investors want to know: Will affordability concerns tip the outcome? And what could changes in Congress mean for spending, regulation and markets?

 

While this election will likely reshape Washington, it won’t necessarily reshape the investment outlook. Under a divided government, executive actions and regulatory changes could move stocks in some industries. However, inflation, growth and corporate earnings will likely remain the biggest drivers of broader market performance.

 

Here are answers to some of the top questions we’ve been hearing on the road.

1. What is Morgan Stanley’s outlook for the House and Senate races?

Morgan Stanley continues to expect Democrats to regain the House of Representatives, where they need to gain just three seats to reach a 218-seat majority. However, our Senate outlook has shifted in recent weeks from a GOP hold to a toss-up with the Democrats having a slight edge.

 

The Senate race has become more competitive as cost-of-living pressures and a less optimistic consumer outlook weigh on the party in power. Still, Democrats need to gain four seats overall in the 100-seat Senate to take control, and Republican campaign resources and conditions in individual races could still limit Democratic gains.

 

If Democrats take the House, as we expect, the result would be a divided government regardless of which party controls the Senate. It’s difficult to make sweeping legislative changes under those circumstances.

2. Is a divided government good for markets?

A divided government can often help markets because political gridlock makes sweeping legislative changes to taxes, regulation and government spending less likely.

 

Historically, under a Republican president, the S&P 500 Index has gained about 16% on average in the calendar year following midterms when Democrats control both chambers of Congress and 23% when control of Congress is split between the parties.

 

However, past performance does not guarantee future results. And equities have already performed better in 2026 than in the typical second year of a presidential term, potentially leaving less room for gains after the midterms.

 

That may be particularly true in technology and energy, where stocks are up substantially this year. Headlines about regulatory scrutiny or potential cuts in government support could prompt pullbacks in those sectors, even when companies’ longer-term earnings prospects remain unchanged. Such declines may create selective opportunities for investors when market reactions to policy headlines exceed the likely impact on businesses.

 

3. Would political gridlock eliminate policy uncertainty?

No. Policy changes through executive authority and federal agencies can still affect markets. Congressional hearings, investigations and proposals can also move stocks, even when legislation is unlikely to pass.

 

For investors, the key is determining whether a policy development could change a company’s costs or earnings prospects, rather than simply cause short-term volatility. But congressional gridlock would materially limit the scope for major legislation affecting government funding or corporate costs—and therefore the potential for lasting changes to company results from such legislation.

i
Congressional gridlock would materially limit the scope for major legislation affecting government funding or corporate costs.

4. What could opposition to data centers mean for AI-related stocks?

Growing opposition to data centers could delay some projects and cause short-term price swings in stocks tied to AI infrastructure, but it will not necessarily weaken their longer-term prospects. State or local pauses on development, for example, may delay projects, but they may also lead to agreements on power-grid improvements and other infrastructure investments that address community concerns about electricity costs.

5. Could an end to the Iran war affect the election?

An end to the Iran war before Nov. 3 appears increasingly unlikely. Even if the conflict ends by then, consumer relief from high energy costs and broader price pressures would likely arrive too late to lift voter sentiment enough to affect the election outcome.

 

Morgan Stanley Research estimates that, after the Strait of Hormuz reopens, it could take roughly four months to restore 75% of lost Middle East production, with full recovery extending well into 2027. Logistical and technical bottlenecks would likely keep oil and fuel supplies tight in the interim, limiting how quickly energy costs could ease for households and businesses.

6. Could the midterms change the debt and interest rate outlook?

The election alone is unlikely to substantially change the longer-term outlook for interest rates or the U.S. deficit—the gap between government spending and revenue.

 

Heavy government borrowing and Treasury issuance tend to put upward pressure on bond yields, often weighing on asset prices. Spending cuts could modestly reduce government borrowing, but substantially shrinking that gap would require broader tax and spending changes, which will likely be difficult under divided government. The takeaway: A change in Congress won’t necessarily bring substantially lower rates or a lasting boost for bonds.

i
For investors, inflation, economic growth and corporate earnings are likely to have a more lasting effect on markets than the timing of an election call

7. Could delayed election results affect markets?

A close election or delayed results could cause short-term market volatility, but a delay alone would be unlikely to change the longer-term forces driving markets.

 

Historically, contested House and Senate elections have had limited impact. A broader disruption to election integrity or the electoral process, however, could cause greater turbulence. For investors, inflation, economic growth and corporate earnings are likely to have a more lasting effect on markets than the timing of an election call.

The Bottom Line

While a change in congressional control could affect spending, regulatory oversight and legislative priorities, the business cycle ultimately matters more for broad market performance than which party controls Congress.

 

Whatever happens on Election Day, investors should remain focused on their long-term goals. Work with your Morgan Stanley Financial Advisor before making any tactical changes to your portfolio.

 

To learn more, ask your Financial Advisor for a copy of the report, US Policy Pulse: Midterm Crosscurrents Beyond the Ballot, from Morgan Stanley Wealth Management’s Global Investment Office.

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