Key Takeaways
Persistent factors such as trade policy, geopolitics, and regulatory shifts are expected to exert more influence on financial markets than the midterm election results themselves.
The executive branch remains the primary force behind the policies that carry the most weight for investors are evaluating how the outcome might impact the economy and financial markets.
On Nov. 3, voters will head to the polls to elect all 435 members of the House of Representatives and 35 of the 100 Senate seats, alongside 39 governors and various state and local officials.
While the election will decide which party controls Congress, Morgan Stanley Research anticipates that the results will have a limited effect on the broader policy environment over the coming two years. Regardless of the outcome, the executive branch will maintain its primary influence over the policies most critical to markets, including immigration, regulation, foreign policy, and tariffs.
“We are not saying that midterms are not important,” says Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley. “But investors may find it more productive to focus on plausible policy changes and durable policy themes.”
Markets Tend to Look Beyond Midterms
Historical data indicates that midterm elections have had only a minor impact on financial markets. U.S. equities have rarely seen sustained periods of outperformance or underperformance in the three to six months following an election, and interest-rate markets have generally been steered by Federal Reserve policy rather than election results, according to data from Bloomberg and Morgan Stanley Research.
“We don’t see the midterms producing a shift in policy direction that materially changes the macro outlook. The policy vectors that have driven markets—such as tariffs, geopolitics and deregulation—are all likely to continue.”
Ariana Salvatore
Morgan Stanley’s Head of U.S. Public Policy Research
Morgan Stanley Research also notes that markets have become less reactive to political news cycles over time. An analysis of President Donald Trump’s social media posts regarding the U.S.-Iran conflict and tariffs suggests that equity investors have increasingly learned to look past headline-driven volatility.
Bond markets remain more sensitive to geopolitical developments, particularly when those events have clear consequences for economic growth and inflation. Recent commentary regarding Iran, for instance, has impacted expectations for inflation and oil prices.
“Uncertainty related to tariffs and geopolitical events is likely to persist throughout the remainder of President Trump’s term,” Salvatore says.
Primary Results Offer Early Signals
With approximately half of U.S. states having concluded their primaries by the end of June, early voting trends indicate a slight advantage for Democrats heading into November.
Turnout among Democratic voters has surged 93% compared to the 2022 primaries, with participation climbing in both noncompetitive and competitive districts, according to an analysis by The Washington Post.
“Higher enthusiasm among Democratic voters can potentially mitigate the fact that they are less likely than Republicans to view their own party favorably,” Salvatore says, referring to polling by CNN.
Simultaneously, primary <a Putting it together, the primary results so far seem to suggest that the Republican Party remains anchored to President Trump, while the Democratic Party is still debating whether the path to the majority runs through establishment or more progressive candidates," Salvatore says. "However, we don't see the midterms producing a shift in policy direction that materially changes the macro outlook. The policy vectors that have driven markets—such as tariffs, geopolitics and deregulation—are all likely to continue."
