Original title: The Midterm Election Signals Investors Should Watch
Original author: Monica Guerra, Morgan Stanley Wealth Management
Editor's note: As we get closer to the 2026 midterm elections in the United States, political news begins to re-enter investors' horizons. But for markets, a more important question than tracking campaign rhetoric every day is: Which signals are really worth paying attention to, and through what paths will they affect asset prices?
The answer given by Morgan Stanley Wealth Management is the Midterm Signal Monitor (midterm election signal monitoring framework), a set of four indicators: general congressional voting intentions, presidential approval rating, consumer confidence and gasoline prices. They respectively correspond to party support, satisfaction with governance, residents’ economic feelings and the most direct cost of living pressure. Morgan Stanley emphasized that these indicators are more suitable as directional signals to judge changes in the political environment, rather than directly predicting the final congressional seats.
These four indicators actually point to the same question: how American voters feel about the economy. Even though inflation has come down from highs, price levels for food, housing, health care and energy are still significantly higher than they were a few years ago, making the cost of living an important issue in this election cycle. The Reuters/Ipsos survey also showed that the cost of living remains an issue of great concern to voters.
For investors, what ultimately needs to be observed is not the poll itself, but whether these signals are enough to change the power structure of Congress and further translate into regulatory, tax and industry policy changes. Morgan Stanley warned of policy sensitivity in the technology and energy sectors in particular, but also argued that the business cycle, corporate fundamentals, interest rates and the AI investment cycle may still be more important than the election itself.
The following is a compilation of the original text:
As the U.S. midterm elections enter their home stretch, investors need to face a familiar question: How much should politics factor into market pricing?
Morgan Stanley's answer is not to predict who will ultimately control Congress, but to look at four signals first.
The Midterm Signal Monitor built by its wealth management arm mainly tracks: general congressional polling, presidential approval ratings, consumer confidence, and gas prices.
These four data actually cover the most critical transmission paths of the mid-term elections - which party voters tend to support, how they evaluate the current government, how they feel about the current economy, and the most intuitive price pressures in daily life.
As of the time of publication, these indicators overall show that the U.S. political environment is undergoing significant changes. But Morgan Stanley also emphasized that they can only help judge the electoral environment and cannot be directly equated to predictions of final congressional control.
The first signal: Congressional polls, what the market really pays attention to is the power structure
The first is the generic congressional ballot, which is a general congressional voting intention survey that does not target specific candidates.
Unlike single-district polls, which typically ask voters which party they would prefer if a congressional election were held today. As such, the data is more of a thermometer to gauge which way the political winds are blowing nationally than a seat-specific forecasting tool.
Morgan Stanley data shows Democrats' lead widened from 6.1 points to 8.1 points from August to September in the general congressional polls it tracks.
For investors, the focus is not the percentage points themselves, but whether they signal a changing likelihood of a change in the power structure of Congress.
The reason is simple: the market does not directly trade "which party is in the lead." What really affects asset prices is the legislative and regulatory capabilities after the election. If the president's party controls both the White House and Congress, major fiscal, tax, and regulatory agendas usually have greater room to advance; conversely, if a divided government forms, it is often more difficult to pass large-scale policy adjustments through Congress.
Therefore, what really deserves the market’s attention from the congressional polls is the hints they give about future policy space.
The second signal: Presidential support rate, observing the "ruling party pressure" in the mid-term elections
The second indicator is presidential approval rating.
Midterm elections are often not only contests between local candidates but also influenced by voters' evaluation of the current administration. Therefore, the presidential approval rating can help investors observe the political environment facing the ruling party.
Morgan Stanley data showed the president's approval rating tracked at the time of its article was around 40%, up slightly from 39.5% previously but still within a range that historically has typically meant greater midterm election pressure for the ruling party.
A common misunderstanding needs to be avoided here: low support for the president cannot mechanically deduce how many seats a certain party will lose. What's really useful is to put it together with indicators like congressional polls and consumer sentiment to see if the different signals are pointing in the same direction.
If multiple indicators deteriorate at the same time, the market's expectations for the future congressional structure and policy path may see a more significant adjustment.
The third signal: consumer confidence, whether economic data is good or not does not mean whether voters think it is good or not
A third indicator is more directly related to the economy than political polls: consumer confidence.
Morgan Stanley cited data showing consumer confidence fell to an early reading of 47.8 in September from 51.7 in August, significantly below its historical election-year average.
The importance of this metric is that it can help explain a seeming paradox: Macroeconomic data and how voters actually feel do not always line up. Even if the U.S. inflation rate has dropped significantly from its peak, it does not mean that the price increases of the past few years have been reversed.
When inflation falls, it means that prices are rising more slowly; when price levels remain high, it means that things have not become cheaper again. After years of cumulative increases in high-frequency expenses such as medical care, food, housing and energy, families still need to face higher daily expenses. Morgan Stanley therefore believes that a core economic theme of this midterm election is not simply "inflation", but broader affordability, that is, the affordability of the cost of living.
That's why consumer confidence deserves a separate look: It measures not GDP or corporate profits, but how voters themselves feel about the economy. For markets, if economic growth remains stable but consumer sentiment continues to deteriorate, it means a possible divergence between economic fundamentals and political feedback.
The fourth signal: Gasoline price, the most direct “wallet indicator”
The fourth signal is probably the most intuitive: gas prices.
Energy prices differ from many macro indicators. Consumers don't need to read CPI reports to feel the price change every time they fill up. Morgan Stanley therefore included gasoline prices separately in its midterm election monitoring framework. Its data shows that as of the time of publication, the year-on-year increase in regular gasoline prices has further expanded.
What's more, the impact of fuel prices doesn't stop at the pump. Rising diesel and transportation costs may further affect the prices of logistics, food and other daily necessities. Therefore, energy prices are both an independent indicator of the cost of living and may also reinforce consumers' feelings about overall prices.
This means that in the final weeks before polling day, gasoline price trends may be more directly accessible to voters than some low-frequency macro data. But it is also important to note that energy prices are only one of many factors that influence voting behavior and cannot be used alone to derive election results.
After the four signals, what investors really want to look at is policy risk
Putting these four indicators together, Morgan Stanley actually provides investors with a relatively clear chain of observation: Congressional polls look at party support → Presidential approval ratings look at governing pressure → Consumer confidence looks at economic feelings → Gasoline prices look at the most direct pressure on the cost of living.
But this chain still has to fall on the market eventually. For investors, the most important impact of the midterm elections is not the results on voting day itself, but what policy expectations need to be repriced after changes in the power structure of Congress.
Morgan Stanley mentioned two sectors in particular.
One is technology. If the power structure of Congress changes, some technology companies may face more scrutiny on competition, data privacy and artificial intelligence. Even if no major new legislation ultimately emerges, congressional hearings and regulatory discussions could increase policy uncertainty.
Another is energy. With energy prices already becoming a cost-of-living issue for voters, energy companies may face more political attention related to prices, taxes and fossil energy policies.
The key word here is still "possible".
A change in control of Congress does not mean that new policies will be passed; increased regulatory discussions do not mean an immediate change in corporate profits. What investors really need to watch is whether political changes move from campaign issues into legislative and regulatory processes.
The last signal: Don’t let the election overshadow the variables that really determine U.S. stocks
Morgan Stanley’s final reminder is not to overtrade the midterm elections.
Historically, divided government has not necessarily meant worse stock market performance. The agency's historical statistics show that in a sample of Republican presidents, the S&P 500 has recorded higher historical average returns one year after the midterm elections when Congress is controlled by both parties. One explanation given by Morgan Stanley is that political gridlock may reduce the probability of sudden major policy changes.
But historical average performance cannot be used to predict market returns after this election.
So as the midterm elections approach, investors can focus on four signals: congressional polls, presidential approval ratings, consumer confidence and gas prices. Among them, the first two help determine whether the political landscape is changing, and the latter two help determine whether cost-of-living pressures are continuing to affect voter sentiment.
What really needs to be confirmed is the next step: whether these signals will eventually translate into changes in the power structure of Congress, and whether the new congressional structure can further change tax, regulatory and industry policies.
Until then, the midterm elections are better suited as a policy risk variable rather than an independent indicator of market direction. As Morgan Stanley emphasized, the business cycle, corporate fundamentals, inflation, interest rates, and the AI investment cycle may still be more important factors affecting market performance.
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