The election will be good news, regardless of outcome, says Morgan Stanley's chief stock-market strategist

By Steve Goldstein

With expectations for a Democratic sweep, the midterm elections may be a "clearing event" for the stock market, according to a Morgan Stanley strategist.

The winner of the midterms is going to be the U.S. stock market.

That's the take from Morgan Stanley's chief stock-market strategist, Mike Wilson, who said the midterms are a classic "clearing event" whose outcome at this point doesn't really matter.

Since 1982, large-capitalization stocks have gained approximately 15% on a cap-weighted basis and 16% on an equal-weighted basis in the six months following midterms, with both measures rising roughly 22% over the subsequent year, he noted.

"A Democrat sweep via a narrow Senate majority is anticipated by investors and therefore unlikely to be a major market surprise, while a much more decisive Senate victory would potentially push the equity market to look further out to 2028 in terms of pushback against deregulation," he said in a note to clients.

"With that said, many of the policies that have moved markets most over the last two years, including tariffs, foreign policy and agency-led deregulation, remain largely under executive branch's control, and equities typically don't think two years ahead very often or for very long."

The prediction market Kalshi on Monday was indicating a 71% chance of a Democratic sweep and a 24% chance the Republicans maintain control of the U.S. Senate.

He even pointed to possible good news from a Democratic majority - citing possible efforts to delay or reverse Medicaid and food-stamp cuts that could support consumption. Another potential bonus would be a pulling forward of investment and M&A activity to beat a shift in policy in 2028.

That's not to say Wilson doesn't see threats. He identified the more significant risk is the potential for renewed military escalation with Iran or additional tariffs after the election.

Wilson said the correction that began in June is now in the final innings, with both the S&P 500 retreating as breadth improves.

He said that since the end of September, 10-year Treasury yields BX:TMUBMUSD10Y have declined by nearly 40bp, while the percentage of S&P 500 SPX stocks above their 200-day moving average has risen about 20 percentage points to 62%. During that time period, the equal-weighted S&P 500 RSP has gained nearly 5%, outperforming the cap-weighted index by almost 6%, he said.

"This supports our view heading into October that back-end yields were likely approaching a peak, and that the equal weight S&P was the more attractive expression of the broadening trade."

The "lower quality" Russell 2000 RUTlikely needs a bigger decline in rates than what has already occurred.

-Steve Goldstein

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11-02-26 0415ET