Bearish sentiment among U.S. retail investors has climbed to its highest level in over a year, according to Morgan Stanley Wealth Management's Q4 2026 Investor Pulse Survey. The survey, conducted from October 1 to October 23 among 953 U.S. investors, found that 42% now describe themselves as bearish, a four-percentage-point increase from the third quarter. The shift reflects a convergence of persistent inflation, rising expectations for further Federal Reserve rate hikes, and uncertainty surrounding the November 3 midterm elections.
Inflation remains the dominant worry, cited by 54% of respondents, up two points from the prior quarter. The Fed's first rate increase in more than three years has also heightened expectations for another hike at the next meeting, with 34% of investors now anticipating a move, up from 27% in Q3. For advisors, this shift has direct implications for fixed-income positioning and year-end portfolio reviews.
Political uncertainty is compounding the anxiety. Nearly half of respondents (48%) said they are concerned about the potential impact of the midterms on the stock market. That level of concern is consistent with historical patterns; research has shown that demand for advisor guidance tends to spike during election cycles, as clients seek clarity on how political outcomes might affect their portfolios. A recent UBS survey of millionaire investors similarly found heightened interest in professional advice ahead of the vote.
Despite the gloomier outlook, most investors are not making drastic changes. More than four in five respondents (86%) said they believe their portfolio is well-positioned against inflation, and 42% reported no plans to alter their allocations over the next six months, up from 39% in Q3. This inertia may reflect a learned response to repeated market scares, including tariff anxiety and geopolitical disruptions, which have tested investor discipline in recent quarters.
Chris Larkin, managing director and head of trading and investing at E*TRADE from Morgan Stanley, noted that market fluctuations are inevitable and that discipline is key during such periods. "Investors seem to understand that—even as they brace for potential volatility, they're staying focused on the bigger picture," he said.
Sector preferences for the final quarter show continued appetite for technology, with information technology retaining its top spot at 55%, supported by ongoing interest in artificial intelligence. Energy climbed four points to 47%, ranking second, as geopolitical concerns and oil-supply worries kept the sector in focus. Health care held third at 33%, reflecting its appeal as a defensive allocation in a choppy market environment.
The survey, fielded by Dynata, carries a margin of error of plus or minus 3.20 percentage points at the 95% confidence level. The panel included self-directed investors, fully delegated investors, and those using a hybrid approach, with investable assets ranging from below $500,000 to over $1 million. As advisors navigate this environment, they may also want to monitor hybrid investors' higher defection risk and the potential for over-reliance on AI-generated answers among advised clients.
