Episode summary
Signals to Watch in the U.S. Midterms
Thoughts on the Market (Morgan Stanley)
· · 9 min · Hosts: Ariana Salvatore, Monica Guerra
Summary
With Election Day a week away, the episode argues that markets should care more about the policy and fiscal aftermath of the U.S. midterms than about which party wins outright. The host and a guest say affordability is the defining voter issue, with their monitor pointing to pressure on the incumbent party: Democrats lead the generic ballot by about eight points, presidential approval is 38.8%, consumer sentiment is at an October low for any pre-midterm year in the University of Michigan survey, and gasoline prices are up 37.6% from a year ago.
The host and the guest say a change in congressional control is unlikely to fundamentally alter the direction of U.S. policy because the executive branch has driven much of the uncertainty in 2025. They expect tariffs, deregulation, immigration, geopolitics, and export controls to remain important, while Congress matters more for fiscal issues like government funding, the debt limit, and defense spending. They also argue that midterm history is not a trading signal: the S&P 500 has averaged about a 14% return in the year after midterms versus roughly 3% in the midterm year, but they caution against using that pattern to make portfolio decisions.
The most concrete investment implications, they say, are local and sector-specific. AI infrastructure should continue, but political resistance at the state and local level could affect electricity costs, water usage, and where projects get built. The same goes for taxes and municipal finance, where state and local proposals may matter more than federal policy. Their bottom line is that investors should focus on meaningful policy changes, not political noise.
Key takeaways
- Affordability is the key midterm issue, with consumer sentiment weak and gasoline prices up 37.6% year over year, according to the guest’s monitor.
- The host and the guest expect divided government to matter more for fiscal negotiations than for broad U.S. policy direction.
- The guest says the S&P 500 has averaged about 14% in the year after a midterm election, but warns against treating that as an investing rule.
- AI infrastructure remains a bipartisan priority in Washington, but state and local resistance could change the pace and geography of new projects.
- For investors, local electricity costs, municipal bonds, and state tax proposals may be more relevant than federal headlines.
- The host says the most important post-election watch items are government funding, the debt limit, NDAA timing, and U.S.-China meetings.
Notable quotes
“what happens after the election is probably more important than the outcome itself”
“affordability has really emerged as the defining issue for voters this cycle”
“our view has been that the midterms are unlikely to fundamentally change the direction of US policy”
“the S&P 500 has averaged about a 14% return in the calendar year following a midterm election”
How the episode opens
Welcome to Thoughts on the Market. I'm Ariana Salvatore, head of US public policy research at Morgan Stanley. And I'm Monica Aguero, head of policy and geopolitical strategy for Morgan Stanley Wealth Management.
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 10 a.m. 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 makes 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? 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% just below the 40% 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% 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.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- u.s. midterms
- election day
- market impact
- us public policy
- wealth management
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “Signals to Watch in the U.S. Midterms” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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