Midterm Elections: More Noise Than Change?

As the U.S. heads toward its November midterm elections, investors are weighing what the results could mean for markets and the economy.

On Nov. 3, voters will elect all 435 members of the House of Representatives and 35 of the Senate's 100 seats, while also choosing 39 governors and a range of state and local officials.

While the election will determine the balance of power in Congress, Morgan Stanley Research expects its outcome to have only a limited impact on the broader policy backdrop over the next two years. Regardless of the results, the executive branch will retain primary influence over the policies that matter most to markets, including tariffs, foreign policy, regulation and immigration.

"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

History suggests that midterm elections have had only a modest impact on financial markets. U.S. equities have rarely experienced sustained outperformance or underperformance in the three to six months following the vote, while interest-rate markets have generally been driven more by Federal Reserve policy than election outcomes, according to data from Bloomberg and Morgan Stanley Research.

Morgan Stanley Research also finds that markets have become less sensitive to political headlines over time. An analysis of President Donald Trump's social media posts on tariffs and the U.S.-Iran conflict suggests that equity investors have increasingly looked through headline risk.

Bond markets remain more responsive to geopolitical developments, particularly when they have direct implications for inflation and economic growth. Recent comments related to Iran, for example, have influenced expectations for oil prices and inflation.

"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 roughly half of U.S. states having completed their primaries by the end of June, early voting patterns point to a slight Democratic advantage heading into November.

Turnout among Democratic voters has increased 93% compared with the 2022 primaries, with participation rising in both competitive and noncompetitive districts, according to an analysis done 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.

At the same time, primary results suggest the Democratic coalition remains divided between establishment and progressive candidates.

A more fragile Democratic majority could generate greater political uncertainty, while a more cohesive majority could slow or weaken efforts to continue reducing social programs, Salvatore says.

Republicans, meanwhile, face their own challenges, including declining approval ratings for President Trump and the relatively low name recognition of several candidates he has endorsed in state races.

"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."