Midterm gridlock is not the market risk to price, two houses argue, earnings and rates are

The expected outcome

Morgan Stanley expects the midterm elections to produce a divided government, with Democrats favored to regain the House of Representatives and the Senate remaining a toss-up with a slight Democratic edge. The arithmetic it cites is tight: Democrats need to gain three seats to reach a 218-seat majority in the House, and four seats to take control of the 100-seat Senate. Janus Henderson reaches a similar place from a different angle, saying a return to split control of the federal government is likely, and that split government often creates near-term gridlock. Neither house treats that gridlock as a market shock in itself. m:…3737 m:…9286

The historical case for calm is unusually specific. Morgan Stanley says divided government historically helps markets by reducing the likelihood of sweeping legislative changes, and that contested elections have historically had limited impact on markets. Janus Henderson says gridlock is not necessarily an unfavorable condition for financial markets, and that equities generated similar returns under unified or split control of Washington over the past 50 years. Split government has been the governing arrangement for nearly 65 percent of the past 50 years, according to Janus Henderson, which makes it the normal condition rather than the exception. m:…3737 m:…9286

What actually drives returns

Both houses redirect attention to the same drivers. Morgan Stanley says inflation, growth and corporate earnings are the biggest drivers of broader market performance, and that the election is unlikely to substantially change the long-term outlook for interest rates or the deficit. Janus Henderson says corporations make capital allocation decisions that play out over multiple election cycles, that change within the policy framework tends to be incremental, and that fiscal profligacy is occurring in both political parties and most Western European governments. In that framing, the election changes the cast, not the fiscal arithmetic. m:…3737 m:…9286

Affordability is the voter concern that connects politics to economics in both notes. Janus Henderson says affordability is a primary concern for many voters, and that stubborn inflation has led the Federal Reserve to initiate a rising rate regime. UBS adds that US consumer sentiment is weighed down by the affordability crisis, while noting that the affordability crisis has had less impact on consumer actions than on sentiment, and that the US administration is increasingly concerned about the mid-term elections. The political risk, in this account, is not a market crash on election night, but a policy debate shaped by voters feeling squeezed even while spending holds up. m:…9286 m:…0340

The AI footnote that matters

Artificial intelligence appears in both midterm notes as a local issue with national market implications, and both houses downplay it as a brake on the buildout. Morgan Stanley says opposition to data centers may cause short-term price swings in AI-related stocks. Janus Henderson says data-center backlash in local campaigns is unlikely to materially slow down AI infrastructure buildout, that hyperscalers are investing heavily in AI infrastructure to grow earnings over the next decade, and that AI has the potential to shift the trajectory of economic and earnings growth over the next decade. The shared judgment is that local opposition can move a stock for a week, while capital allocation decisions made over multiple election cycles determine whether the infrastructure gets built. m:…3737 m:…9286

Rates remain the larger variable. Janus Henderson says markets expect up to three more rate hikes before mid-2027, and that the Federal Reserve raised interest rates in September 2026. Morgan Stanley says heavy government borrowing and Treasury issuance put upward pressure on bond yields. Put together, the midterm story for a professional is not about picking a party. It is about whether earnings growth, inflation and the rate path confirm the market pricing already in place, while a divided government limits sweeping legislative change in either direction. m:…9286 m:…3737

What to watch

The test of this calm framing will come in the data both houses cite as decisive: inflation, growth and corporate earnings, rather than the seat count alone. If earnings hold and inflation does not firm further, the historical pattern of limited midterm market impact has room to repeat. If inflation firms or the rate path steepens, the election will matter less as an event and more as a backdrop to a fiscal debate that, as Janus Henderson notes, is already marked by profligacy in both parties. Either way, the advice embedded in both notes is to keep the investment horizon longer than the election cycle, because the capital decisions that matter already are. m:…3737 m:…9286