Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan, once wrote:
“Here is the interesting thing about the stock market: it cannot be indicted, arrested or deported; it cannot be intimidated, threatened, or bullied; it has no gender, ethnicity or religion; it cannot be fired, furloughed or defunded; it cannot be primaried before the next midterm elections; and it cannot be seized, nationalized or invaded. It is the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, taxation and predictable rule of law.1
Votes matter. Investors vote with their hard-earned dollars and citizens vote with their hard-earned rights. Both types of votes offer a unique opportunity to provide feedback and implement change when necessary. The ongoing earnings season and upcoming midterm elections give us a chance to observe both forms of voting in real time.
It is a thing of beauty.
How Are Investors Voting Right Now?
In November, citizens will vote on several issues. Voters have strong opinions on artificial intelligence data centers, foreign conflicts, inflation, government spending, and a host of other important topics that we have no intention of wading into here. What we can do, however, is examine how investors are voting on many of those same issues through financial markets.
It is no secret that corporate earnings are the primary driver of stock prices over the long run. If a company earns more money, its stock generally rises over time. Simple.
On the surface, the outlook for corporate America remains remarkably positive. Earnings growth continues to exceed expectations; profit margins remain healthy, and many of the country's largest companies continue to generate substantial cash flow. The market's verdict on corporate earnings remains favorable and has continued to push the stock market to new all-time highs.
Figure 1. Corporate Earnings Have Been Unusually Strong
S&P 500 Earnings-Per-Share vs. the S&P 500
Sources: Standard & Poor’s, Bloomberg L.P., and Potomac. Data as of October 21, 2026 for S&P 500 and 3Q 2026 estimate for EPS.
Based on consensus estimates, this stretch is likely to continue, with S&P 500 earnings per share expected to grow by another 19.7% in 2027 and 16.8% in 2028. Back-to-back years of double-digit earnings growth should continue to be a strong tailwind for a market that is also contending with inflation and the potential for additional Fed rate hikes.
That does not mean investors are sanguine about potential risks. One of the clearest voting patterns suggesting otherwise is the move away from companies without current profits. Looking at the Russell 2000, a U.S. small-cap index of roughly 2,000 stocks, unprofitable companies have seen a significant sell-off relative to those generating profits.
The reason is relatively straightforward. Unprofitable stocks are disproportionately dependent on cash flows expected far into the future, effectively making them long-duration assets. As the cost of capital rises, the discount rate applied to those future cash flows rises with it, reducing what those prospective earnings are worth today. Put more simply, a dollar today is worth more than a dollar promised years from now, and that difference becomes increasingly important as interest rates rise.
Figure 2. Investors Are Increasingly Sensitive About Earnings
YTD Return of Morgan Stanley’s Profitable vs. Unprofitable Russell 2000 Indices
Sources: Bloomberg L.P., and Potomac. Data as of October 21, 2026. Investors cannot invest in an index directly. Past performance does not guarantee future results.
This divergence can also be seen beneath the surface of the S&P 500, where the Magnificent Seven are up 10.7% while nearly one-third of S&P 500 constituents are more than 20% below their trailing 52-week highs.
Figure 3. The Percentage of Stocks in a "Bear Market” is Elevated
Percentage of S&P 500 Constituents More Than 20% Below Their Trailing 52-Week High
Sources: Standard & Poor’s, Bloomberg L.P., and Potomac. Data as of October 21, 2026.
Interestingly, Technology stands out as the most damaged sector beneath the surface of the S&P 500 despite the solid gains from the largest technology companies. Industrials rank second, but for a somewhat different reason.
Like unprofitable small-cap stocks, Technology can be particularly sensitive to rising bond yields because higher discount rates reduce the present value of future earnings and can compress the valuations investors are willing to assign to that growth.
That pressure has been particularly pronounced among semiconductors, where 15 of the S&P 500's 20 semiconductor stocks are at least 20% below their 52-week highs. Industrials, on the other hand, are more directly exposed to the real economy. Higher financing costs make capital investment more expensive and can reduce demand for large projects, while higher oil prices raise costs for transportation and other energy-intensive businesses. That pressure is especially evident in transportation, where 7 of 14 S&P 500 stocks are down at least 20% from their highs, helping push 39 of 83 Industrials into similar drawdowns.
Figure 4. Technology and Industrial Stocks Have Suffered Beneath the Surface
Percentage of the S&P 500 Sector Stocks More Than 20% Below Their Trailing 52-Week High
Sources: Standard & Poor’s, Bloomberg L.P., and Potomac. Data as of October 21, 2026.
That is an important distinction. Investors do not appear to be voting against corporate America broadly. Rather, they are becoming more discriminating about where they are willing to pay for growth and which businesses are most exposed to higher rates, more expensive capital, and rising input costs.
Should Investors be Worried About the Midterms?
Politics will dominate the headlines as the midterm elections approach, but history suggests investors should be careful about letting politics dominate their portfolios. Since 1950, the S&P 500 has been higher one year after every midterm election, with an average total return of 18.8% over the following 12 months (please see Three Months, Four Seats for more details). This time, we suspect corporate earnings and the artificial intelligence investment cycle will remain in the driver's seat. Unless the election materially changes the outlook for earnings, interest rates or economic growth, politics is unlikely to replace those forces as the market's primary driver.
There is one area, however, where Washington could have an enormous impact on long-term investors: the country's fiscal trajectory. Perhaps the single most important thing policymakers could accomplish for the country's long-term financial health is to begin arresting the growth of the federal debt.
Social Security offers a tangible reminder that some of these long-term problems are getting closer. The 2026 Social Security Trustees Report projects that the Old-Age and Survivors Insurance Trust Fund, which supports retirement and survivors benefits, will exhaust its reserves in late 2032. At that point, ongoing revenues would be sufficient to cover just 78% of scheduled benefits absent legislative changes.
These are real issues that need real answers.
Figure 5. Social Security Trustees and the Congressional Budget Office Projections
Sources: Social Security Trustees, Congressional Budget Office, and Potomac. Data as of September 21, 2026.
That brings us back to the ultimate voting machine. Washington gets its vote in November, but markets vote every day. The election will matter, but over the long run, Washington's willingness to address the country's fiscal trajectory may matter considerably more.
For additional insights about the upcoming midterm elections, please see our latest webinar Navigating the 2026 Midterm Elections: Power, Policy, and Portfolios with Special Guest Steve Pavlick, Head of Washington Policy at Renaissance Macro.
