The Midterm Election Signals Investors Should Watch

• Affordability is likely to be a defining issue in the 2026 midterms, as voters continue to face higher costs for everyday necessities.
• Cost pressures, weaker polling and softer consumer sentiment point to a challenging backdrop for Republicans.
• If Democrats gain more control in Congress, select technology companies and energy producers could face greater political scrutiny.
• Still, a divided government could limit sweeping policy changes and reduce the risk of disruption for the market.
• Investors should avoid overreacting to election noise, as the business cycle, corporate fundamentals and artificial intelligence investment are likely to remain bigger market drivers.

With the 2026 U.S. midterm elections fast approaching, investors are watching Washington closely. But one of the most important signals may be coming from somewhere else: the household budget.

Affordability remains the defining economic issue of the campaign, as voters continue to feel the strain of higher prices for necessities such as healthcare, food, housing and energy. That pressure comes as pre-election indicators increasingly appear to favor Democrats winning back the House while Republicans retain Senate control, based on current conditions.

Investors are paying attention. The final balance of power could affect policy, equity sector risks and market expectations heading into 2027.

Here’s what to know as Election Day approaches.

The Price Level Problem Voters Can't Ignore

Price levels, not inflation, are shaping voter behavior and raising sector-specific policy risk into midterms.

The 2026 midterms matter for investors because the final balance of power in Congress could shape policy priorities, regulatory pressure and the market’s view of what comes next. A shift in congressional control may affect which sectors face more scrutiny, how easily new legislation can pass and how markets interpret the policy backdrop.

At the same time, investors should avoid treating the election as the only driver of returns. The economy, company fundamentals, inflation, interest rates and the artificial intelligence investment cycle are all likely to remain more important for market performance.

Affordability may be the most important economic theme of this election because many households continue to feel the cumulative effect of higher prices, even as the inflation rate has declined.

According to an Aug. 30 Reuters/Ipsos poll, 47% of registered voters say the cost of living will be the single most important factor in their voting decision, up from 39% in January.

Pew Research has also found broad concern about several recurring necessities:

• Healthcare: Healthcare premiums grew 53% from 2015 to 2025, outpacing worker earnings and overall inflation, keeping medical costs high on voters’ minds.
• Food: Food prices have risen approximately 30% since 2021, reflecting pandemic disruptions, higher input costs and shocks such as the war in Ukraine, avian flu and drought.
• Housing: The average 30-year fixed mortgage rate reached 7%, while the median new home sales price has risen 66.7% over the past 20 years to $410,700.
• Energy: Residential electricity prices are up roughly 50% since 2017, and higher diesel prices can flow into food, shipping and other everyday costs.

These pressures help explain why slower inflation does not necessarily mean household costs have normalized. For many voters, the issue is not simply whether prices are rising more slowly, but whether essential expenses remain difficult to manage.

Morgan Stanley Wealth Management’s Midterm Signal Monitor tracks four measures that have historically helped frame the direction of midterm elections: generic congressional polling, presidential approval, consumer sentiment and gasoline prices.

Between August and September, those indicators pointed to a more challenging environment for the president’s party:

• Generic Congressional Polling: Democrats’ lead widened to 8.1 percentage points, from 6.1 percentage points.
• Presidential Approval: Presidential approval edged up to 40%, from 39.5%, but remains near a level historically associated with momentum for the opposition party.
• Consumer Sentiment: Consumer sentiment declined to 47.8, from 51.7, putting it well below the 85.0 historical election-year average.
• Gasoline Prices: Regular gasoline price growth accelerated to 29.5%, from 25.8%, underscoring how everyday costs can shape the national election backdrop.

Taken together, these indicators point to a challenging national backdrop for Republicans—though they should be viewed as directional signals rather than a forecast of congressional control.

Some sectors, such as technology and energy, could become more sensitive to policy risk if the midterm outcome shifts control of Congress, especially after strong year-to-date gains.

While the economy and company fundamentals have been the main drivers of equity performance this year, investors may want to keep an eye on potential risks for:

• Select Technology Companies: A Democratic shift in Congress could bring more scrutiny of competition, data privacy and AI. Even without major new laws, hearings and headlines could weigh on sentiment.
• Energy Producers: Energy companies could face closer attention on prices, taxes and fossil fuel policy, especially while household energy costs remain a focus for voters.

Past midterm cycles suggest these sectors can lose momentum in similar environments, even if major policy changes do not follow.

Still, history is not a forecast. The market and sector impacts of the 2026 midterms will depend on how the election reshapes the policy backdrop, how investors interpret that shift and whether lawmakers can turn oversight priorities into actual policy changes.

Divided government is not always bad for markets. In fact, history suggests that periods of political gridlock can sometimes create a more stable backdrop for equities. Morgan Stanley Wealth Management’s Global Investment Office found that the strongest average S&P 500 return in the year after midterm elections under a Republican president came when Congress was split between the two parties, at 23%.

The reason may be simple: Fewer big policy swings can mean fewer market disruptions. When Congress is divided, or when the opposition party controls both chambers, it can be harder for Washington to pass major legislation. That can create a more stable backdrop for investors.

Investors should treat the midterms as an important policy event, but not as the primary driver of portfolio decisions.

For investors, the key is discipline. Elections can create noise and shift the policy backdrop in meaningful ways. However, macroeconomic conditions, the business cycle, inflationary pressures and the artificial intelligence investment cycle are likely to remain the primary drivers of market performance.

In short: Watch Washington closely, but keep the broader economy at the center of portfolio decisions.

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

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