New Delhi [India], October 29 (ANI): The upcoming US midterm elections are unlikely to significantly alter the country's long-term interest rate and fiscal deficit outlook, while delayed results could trigger short-term market volatility, according to a report by Morgan Stanley.

With the US midterm elections approaching, the report noted that inflation, economic growth and corporate earnings are likely to remain the key drivers of broader market performance, rather than the election outcome.

On the political outlook, Morgan Stanley expects Democrats to regain control of the US House of Representatives, while revising its Senate outlook from a Republican hold to a toss-up with a slight Democratic edge. It further noted that rising living costs and weakening consumer sentiment have made the Senate race more competitive. 

However, it added that a "divided government" could limit major legislative changes involving taxes, regulations and spending. 

Highlighting historical market trends, the report stated, "Historically, under a Republican president, the S&P 500 Index has gained about 16% on average in the calendar year following midterms when Democrats control both chambers of Congress and 23% when control of Congress is split between the parties," it said.  

However, Morgan Stanley cautioned that US equities have already performed better in 2026 than in the typical second year of a presidential term, potentially leaving "less room" for gains following the midterm elections.

The report further flagged that technology and energy stocks could face pressure from regulatory scrutiny and potential cuts in government support. 

It said, "Growing opposition to data centers could delay some projects and cause short-term price swings in stocks tied to AI infrastructure, but it will not necessarily weaken their longer-term prospects."

"The election alone is unlikely to substantially change the longer-term outlook for interest rates or the U.S. deficit-the gap between government spending and revenue," it added. 

As per Morgan Stanley, heavy government borrowing and increased Treasury issuance could push bond yields higher, putting pressure on asset prices. While spending cuts may help reduce borrowing, significantly narrowing the fiscal deficit would require broader tax and spending reforms, which could be difficult under a divided government.

Overall, "A close election or delayed results could cause short-term market volatility, but a delay alone would be unlikely to change the longer-term forces driving markets," it said. (ANI)