Thoughts on the Market
2026-10-29 · Hosted by Mike Wilson · Morgan Stanley
Executive Summary
With the U.S. midterm elections about a week away, Morgan Stanley's Ariana Salvatore and Monica Guerra discussed what investors should watch. Monica Guerra's Midterm Signal Monitor shows a challenging environment for the incumbent party: Democrats lead the generic congressional ballot by about 8 points, presidential approval sits at 38.8% (below the 40% threshold where the opposition tends to gain momentum), consumer sentiment in October is the lowest of any pre-midterm October in University of Michigan survey history, and gasoline prices in September were up 37.6% year-over-year.
Key Stories & Changes
1. Midterm Signal Monitor Points to a Challenging Environment for Incumbents
Democrats lead the generic congressional ballot by ~8 points
Presidential approval at 38.8%, just below the 40% historical reference point
University of Michigan consumer sentiment in October is the lowest of any October before a midterm election in the survey's history
Gasoline prices in September were up 37.6% year-over-year
Monica Guerra attributed the weak backdrop to affordability concerns driven by persistent inflation, elevated borrowing costs, and energy price pressures tied to the Iran conflict
2. Midterms Unlikely to Shift Policy Direction, But Fiscal Negotiations at Stake
Ariana Salvatore said most policy uncertainty since 2025 has come from the executive branch, not Congress, so tariffs, deregulation, immigration, geopolitics, and export controls remain largely unaffected by the midterm outcome
A divided government would make new legislation harder to pass, creating more contentious negotiations over government funding, the debt limit, and defense spending
The NDAA (Pentagon funding bill) comes due in December; potential U.S.-China meetings also flagged as near-term catalysts
3. Historical Market Pattern and This Cycle's Divergence
S&P 500 has historically averaged ~14% return in the year following a midterm election, versus ~3% in the midterm year itself
This year's index has already outperformed the typical second-year trajectory, which Guerra said could heighten risks and opportunities in policy-sensitive sectors like technology and energy amid narrow market breadth
4. AI Infrastructure Build-Out Faces a "Conditional" Path, Not Federal Prohibition
Both speakers agreed there is bipartisan recognition of AI as a strategic priority given competition with China, making a broad federal block unlikely regardless of election outcome
Growing state and local resistance around electricity prices, water usage, and infrastructure costs could make the pace and geographic distribution of AI buildout more dependent on local policy
Relevant for investors exposed to utilities, power generation, and the broader AI infrastructure supply chain, as well as municipal bond markets
5. Tax Policy: Federal Stability, State-Level Variability
No change in congressional composition is expected to meaningfully reverse the tax policies enacted last year through the OBBA (One Big Beautiful Bill Act), given presidential veto authority through the next two years
Midterms could lay groundwork for a different tax debate heading into 2028-2029, specifically around AI and the build-out
At the state level, investors should watch proposals involving wealth taxes, property taxes, and state income taxes, which could affect household financial planning and the municipal bond market
Trends Identified
1. Election as a Micro, Not Macro, Catalyst
Both speakers converged on describing the midterms as more of a "micro" catalyst — affecting specific sectors like technology and energy via oversight and state-level actions — rather than a macro catalyst likely to reshape the broader direction of U.S. policy, since executive action continues regardless of congressional control.
2. Affordability and Energy Costs Are the Defining Political and Market Theme
From the Signal Monitor's gasoline price data to the discussion of electricity costs and data centers, affordability tied to energy prices emerged as the throughline connecting voter sentiment, state-level policy risk, and investment implications for the AI infrastructure build-out.
3. Local and State Policy Increasingly Material for Investors
Both speakers emphasized that national headlines may matter less than state and local government decisions — on electricity pricing, municipal bonds, and state tax proposals — urging investors to track these more granular developments rather than reacting to Washington headlines alone. ---
Sentiment Analysis
Overall Market Sentiment: Measured / Non-Alarmist
Both speakers consistently cautioned against overreacting to political headlines, framing the midterms as creating sector-specific risks and opportunities rather than a macro market-moving event.
Risk Factors Highlighted
Affordability-driven voter discontent: Weak consumer sentiment and high gasoline prices point to a challenging political environment that could extend into fiscal negotiations.
Divided government gridlock risk: A split Congress could complicate negotiations over government funding, the debt limit, and defense spending.
State and local resistance to AI infrastructure: Electricity price and water usage concerns at the state/local level could slow or redirect the pace and geography of AI buildout.
Narrow market breadth amplifying policy volatility: Strength concentrated in technology and energy, combined with this year's market outperformance, could amplify sector-specific reactions to political developments.
Headline risk versus fundamental risk conflation: Both speakers warned investors against assuming political headlines automatically translate into material earnings or macro impacts.
State-level tax policy changes: Wealth, property, and income tax proposals could affect household financial planning and municipal bond markets independent of federal policy stability.
Fiscal calendar risk: The NDAA funding bill due in December and ongoing debt limit/government funding questions pose near-term uncertainty heading into year-end.
This episode was covered in today's [The Market Signal — 2026-10-29](https://marketsignal.beehiiv.com/p/the-market-signal-2026-10-29), a cross-source synthesis of multiple podcast reports.