Michael Zezas, our Global Head of Fixed Income Research and
Public Policy Strategy, highlights what investors need to watch
out for ahead of next year’s U.S. congressional elections.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Global Head
of Fixed Income Research and Public Policy Strategy.
Today, we’re tackling a question that’s top of mind after last
week’s off-cycle elections in New Jersey, New York, Virginia, and
California: What could next year’s midterm elections mean for
investors, especially if Democrats take control of Congress?
It’s Friday, Nov 14th at 10:30am in New York.
In last week's elections, Democrats outperformed expectations. In
California, a new redistricting measure could flip several house
seats; and in New Jersey and Virginia Democrat candidates, won
with meaningfully higher margins than polls suggested was likely.
As such prediction markets now give Democrats a roughly 70
percent chance of winning the House next year.
But before we jump to conclusions, let’s pump the brakes. It
might not be too early to think about the midterms as a market
catalyst. We’ll be doing plenty of that. But we think it's too
early to strategize around it. Why? First, a lot can change—both
in terms of likely outcomes and the issues driving the
electorate. While Democrats are favored
today, redistricting, turnout, and evolving voter concerns could
reshape the landscape in the months to come.
Second, even if Democrats take control of the House, it may not
change the trajectory of the policies that matter most to market
pricing. In our view, Republicans already achieved their main
legislative goals through the tax and fiscal bill earlier this
year. The other market-moving policy shifts this year—think
tariffs and regulatory changes—have come through executive
action, not legislation. The administration
has leaned heavily on executive powers to set trade policy,
including the so-called Liberation Day tariffs, and to push
regulatory changes.
Future potential moves investors are watching, like additional
regulation or targeted stimulus, would likely come the same way.
Meanwhile, the plausible Republican legislative agenda—like
further tax cuts—would face steep hurdles. Any majority would be
slim, and fiscal hawks in the party nearly blocked the last round
of cuts due to concerns over spending offsets. Moderates, for
their part, are unlikely to tolerate deeper cuts, especially
after the contentious debate over Medicaid in the OBBBA (One Big
Beautiful Bill Act).
So, what could change this view? If we’re wrong, it’s likely
because the economy slows and tips into recession, making fiscal
stimulus more politically appealing—consistent with historical
patterns. Or, Democrats could win so decisively on economic and
affordability issues that the White House considers standalone
stimulus measures, like reducing some tariffs.
How does this all connect to markets? For U.S. equities, the
current policy mix—industrial incentives, tax cuts, and AI-driven
capex—has supported risk assets and driven opportunities in
sectors like technology and manufacturing. But it also means
that, looking deeper into next year, if growth disappoints,
fiscal concerns could emerge as a risk factor challenging the
market. There doesn’t appear an obvious political setup to shift
policies to deal with elevated U.S. deficits, meaning the burden
is on better growth to deal with this issue.
Thanks for listening. If you enjoy Thoughts on the Market, please
leave us a review and share the podcast. We’ll keep you updated
as the story unfolds.
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