Key Takeaways
- • Democrats won control of both chambers of Congress in the November 2026 U.S. midterm elections, while also winning gubernatorial races in traditionally Republican states, according to Morgan Stanley's market outlook.
- • Morgan Stanley flags tighter restrictions on data center development as the most significant investor risk, since it could weigh on sentiment toward AI infrastructure investment.
- • The OBBBA includes roughly $900 billion in Medicaid spending reductions and $200 billion in SNAP cuts over the next decade, which Democratic control could delay, soften or reverse.
- • Morgan Stanley expects federal fiscal deficits to remain around 6% of GDP even if the spending cuts remain in place.
- • Democratic control of both chambers effectively rules out a Republican-led budget reconciliation bill when the new Congress convenes in January, removing the primary source of upside risk to Treasury borrowing requirements.
Summary
Democrats secured control of both chambers of Congress in the U.S. midterm elections, according to Morgan Stanley, which argues that the result could reshape fiscal policy and increase scrutiny of AI infrastructure investment, though the firm states its broader economic and market outlook remains intact. The election results raise questions about potential policy changes and their implications for growth, financial markets and asset classes.
Morgan Stanley identifies three policy developments to watch over the short term and as potential foundational themes for the 2028 election. The first is fiscal policy. The One Big Beautiful Bill Act includes approximately $900 billion in Medicaid spending reductions and $200 billion in cuts to the Supplemental Nutrition Assistance Program over the next decade. With Democrats controlling both chambers, some of these reductions could be delayed, softened or reversed during negotiations around upcoming fiscal deadlines. Even so, Morgan Stanley expects federal fiscal deficits to remain around 6% of GDP even if the spending cuts stay in place.
The second is executive-led policy. Much of the policy uncertainty during President Donald Trump's second term has stemmed from executive actions rather than legislation. Morgan Stanley believes Democratic control of Congress is unlikely to materially change the administration's approach to geopolitics, export controls, deregulation and trade, including the upcoming review of the United States-Mexico-Canada Agreement. Investors should therefore expect continued policy uncertainty, particularly where the administration retains substantial executive authority.
The third is AI infrastructure. Decisions on data center projects, including grid interconnection, electricity rate structures for large users, site selection and tax abatements, are largely made by state utility commissions, legislatures and county boards. Morgan Stanley expects a more fragmented regulatory environment, with some jurisdictions remaining receptive while others impose tighter restrictions. The Texas gubernatorial election is particularly significant: Democrat Gina Hinojosa's victory increases the likelihood of substantial project delays, given her campaign platform included a moratorium on new data center approvals. Morgan Stanley Research nonetheless expects the broader AI capital expenditure cycle to remain intact.
Looking beyond these policy shifts, Morgan Stanley maintains its outlook for resilient U.S. economic growth and continued disinflation, and sees the election results as a potential source of additional upside to growth. Delaying or reducing Medicaid and SNAP cuts could support household finances and consumer spending, while delays could modestly increase Treasury issuance in the two- to seven-year maturity range. Democratic control also removes the main source of upside risk to the Treasury's borrowing requirements by ruling out a Republican-led reconciliation bill in January.
Morgan Stanley identifies three policy developments to watch over the short term and as potential foundational themes for the 2028 election. The first is fiscal policy. The One Big Beautiful Bill Act includes approximately $900 billion in Medicaid spending reductions and $200 billion in cuts to the Supplemental Nutrition Assistance Program over the next decade. With Democrats controlling both chambers, some of these reductions could be delayed, softened or reversed during negotiations around upcoming fiscal deadlines. Even so, Morgan Stanley expects federal fiscal deficits to remain around 6% of GDP even if the spending cuts stay in place.
The second is executive-led policy. Much of the policy uncertainty during President Donald Trump's second term has stemmed from executive actions rather than legislation. Morgan Stanley believes Democratic control of Congress is unlikely to materially change the administration's approach to geopolitics, export controls, deregulation and trade, including the upcoming review of the United States-Mexico-Canada Agreement. Investors should therefore expect continued policy uncertainty, particularly where the administration retains substantial executive authority.
The third is AI infrastructure. Decisions on data center projects, including grid interconnection, electricity rate structures for large users, site selection and tax abatements, are largely made by state utility commissions, legislatures and county boards. Morgan Stanley expects a more fragmented regulatory environment, with some jurisdictions remaining receptive while others impose tighter restrictions. The Texas gubernatorial election is particularly significant: Democrat Gina Hinojosa's victory increases the likelihood of substantial project delays, given her campaign platform included a moratorium on new data center approvals. Morgan Stanley Research nonetheless expects the broader AI capital expenditure cycle to remain intact.
Looking beyond these policy shifts, Morgan Stanley maintains its outlook for resilient U.S. economic growth and continued disinflation, and sees the election results as a potential source of additional upside to growth. Delaying or reducing Medicaid and SNAP cuts could support household finances and consumer spending, while delays could modestly increase Treasury issuance in the two- to seven-year maturity range. Democratic control also removes the main source of upside risk to the Treasury's borrowing requirements by ruling out a Republican-led reconciliation bill in January.
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