Midterm elections have long served as a referendum on the party in power. Since 1922, the sitting president’s party has lost an average of 30 House seats and four Senate seats in midterm elections.
That history matters more than usual in 2026 because control of the House is balanced on a knife’s edge: Republicans hold 220 seats to Democrats’ 215, the thinnest margin of control since 1930. Democrats need a net gain of just three seats to flip the chamber, while Republicans can lose no more than two seats and still retain a majority.
Republicans appear well-positioned to hold the Senate, but they face a meaningful risk of losing the House—with turnout, fundraising and cost-of-living pressures all likely to help to determine control.
Here’s what Morgan Stanley Wealth Management’s Global Investment Office thinks investors should be watching in the months ahead.
Why does affordability matter in the 2026 midterms?
At the ballot box, voters tend to respond strongly to the prices of everyday essentials—especially energy costs like gasoline and electricity—which can shape perceptions of financial well-being and influence election outcomes.
While markets tend to track the business cycle more than the political party in office, certain key economic signals have repeatedly shown up in midterm election outcomes:
- Growth: Since 1942, average real GDP growth in midterm years has been 2.9%, below the 3.4% average in nonelection years. Morgan Stanley Research expects 2.3% growth in 2026, up from 2.1% in 2025, supported by continued economic expansion and AI-related productivity gains. Historically, stronger growth can support the incumbent party, but with only a modest pickup expected this year, the GDP impact may be limited.
- Inflation: Inflation often speaks louder with voters than economic growth, because it directly affects affordability. The July consumer price index reading showed headline inflation at 3.5% year over year, an improvement from higher recent readings—but still above the pre-pandemic norm many households use to gauge their financial well-being. Cambridge University research found that unexpected inflationary pressure can reduce the incumbent party’s share of votes by roughly 1.1 percentage points.
- Gas prices: High gas prices amplify inflation concerns. Since 1978, midterm cycles in which gas prices rose from January of the prior year through October of the election year saw the incumbent party lose an average of 32 House seats. When gas prices fell, the average loss was only six seats. With conflict in the Middle East straining global oil and gas supply chains, energy prices remain a key political risk.
- Broader energy costs: In some regions, rapid growth in data-center power demand has pressured power systems and raised energy costs. A Bloomberg analysis found that wholesale electricity prices in localities near data centers rose 267% from 2020 levels, compared with a 30% rise nationally. Gas, electricity and data-center exposure are likely to be regional amplifiers of incumbent-party midterm pressure.
What is the market outlook for the 2026 midterms?
Historically, U.S. equity markets have often performed better after midterm elections as political uncertainty declines and investors gain greater visibility into future policy direction. Treasury yields have often been more volatile during midterm election cycles as investors assess economic conditions and policy implications.
- Equities: Since 1930, the benchmark S&P 500 Index has typically posted muted performance in the year leading up to Election Day, with average cumulative returns peaking at roughly 3% in the month before the vote. Then the pattern has often shifted. After a brief drawdown as results become clear, the index has typically begun to rally about one month later, gaining an average of 13% in the 12 months following midterm elections.
The composition of government also matters for equity investors. Under a Republican president and split Congress, the S&P 500 has historically gained about 23% in the post-midterm year, compared with 12% across all midterm outcomes.
- Fixed income: Treasury yields have tended to be more volatile in midterm years than in nonelection years. Since 1953, the 10-year Treasury yield has fallen 33 basis points on average in the six months before November midterms. This year, however, inflation pressure tied to higher oil prices and a less accommodative Federal Reserve stance have complicated that pattern. Morgan Stanley Research believes the Fed will hold rates steady through year-end, as still-elevated inflation and energy-price uncertainty give policymakers limited room to ease.
How do markets perform under split government?
Divided government has historically reduced the likelihood of major legislative changes, which can increase market confidence by creating greater policy stability. However, it can also lead to budget negotiations, debt-ceiling disputes and government shutdown risks.
Morgan Stanley Wealth Management's Global Investment Office believes defense, technology and financial services could benefit from a divided-government environment.
- Defense: National-security spending often retains bipartisan support, particularly when geopolitical tensions are elevated.
- Technology: Companies tied to artificial intelligence, semiconductors, cybersecurity and enterprise software could continue to benefit from policies emphasizing innovation, infrastructure and competition with China.
- Financial services: Financial institutions could see upside from greater regulatory clarity and a more accommodating environment for mergers and acquisitions.
However, a divided government also typically raises the odds of fiscal standoffs, delayed appropriations, shutdowns and recurring debt-ceiling confrontations. This may create risks for investors in areas like energy, health care, private equity and digital assets.
- Cean energy policies could become more fragmented, potentially creating uneven rules across states and reducing visibility for companies making long-term investment or pricing decisions.
- Health care and pharma stocks may also face fragmentation with tariffs, international reference pricing, supply chain pressures, shifting reimbursement models, and continued scrutiny of public programs adding risk.
- Private equity may face increased scrutiny through federal investigations, particularly in health care, housing and consumer-facing industries, raising reputational and compliance risks.
- Digital assets could face sharper congressional scrutiny as the industry pushes for broader regulatory frameworks. Debates over custody, payments, stablecoins and tokenization could slow momentum or create a more complex path for institutional adoption.
To learn more, ask your Financial Advisor for a copy of the report, US Policy Pulse: The Narrowest of Margins: 2026 Midterm Election Preview, from Morgan Stanley Wealth Management’s Global Investment Office.
