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Delayed election results and a close contest could unsettle markets in the short term, but inflation, economic growth and corporate earnings will remain the key drivers of performance, the investment bank says.
The upcoming US midterm elections could trigger short-term market volatility but are unlikely to significantly alter the country’s long-term interest rate and fiscal deficit outlook, according to a Morgan Stanley report.
The report said inflation, economic growth and corporate earnings would remain the primary drivers of market performance, regardless of the election outcome.
Morgan Stanley expects Democrats to regain control of the US House of Representatives, while the Senate race is now a toss-up, with a slight edge for Democrats. Rising living costs and weakening consumer sentiment have made the contest more competitive.
A divided government could limit major legislative changes involving taxes, regulations and government spending.
Historically, the S&P 500 has gained an average of 16% in the calendar year following midterm elections when Democrats control both chambers of Congress under a Republican president. The average gain rises to 23% when control of Congress is split between the parties, the report said.
However, US equities have already performed better in 2026 than typically seen in the second year of a presidential term, potentially leaving less room for further gains after the elections.
More from BusinessThe report also flagged risks for technology and energy stocks from regulatory scrutiny and potential cuts in government support. Opposition to data centres could delay projects and trigger short-term price swings in stocks linked to artificial intelligence infrastructure, although their long-term prospects may remain intact.
Morgan Stanley warned that heavy government borrowing and increased US Treasury issuance could push bond yields higher, putting pressure on asset prices. While spending cuts could reduce borrowing, significantly narrowing the fiscal deficit would require broader tax and spending reforms.
Overall, a close election or delayed results could unsettle markets temporarily, but the outcome alone is unlikely to change the longer-term forces shaping US interest rates and the fiscal deficit.
