Democrats secured control of both chambers of Congress in the U.S. midterm elections, while also winning gubernatorial races in traditionally Republican states. The results raise questions about potential policy changes and their implications for economic growth, financial markets and asset classes.
For investors, one of the most significant developments is the prospect of tighter restrictions on data center development, which could weigh on sentiment toward artificial intelligence (AI) investment. At the same time, Democratic control of Congress could benefit the healthcare sector and consumer spending with opportunities to revisit planned reductions in federal healthcare and food assistance spending.
We think there are three key policy developments to watch over the short term and as potential foundational themes for the 2028 election, along with their potential implications for markets.
1. Fiscal Policy: Potential Changes to Medicaid and SNAP Cuts
The One Big Beautiful Bill Act (OBBBA) includes approximately $900 billion in Medicaid spending reductions and $200 billion in cuts to the Supplemental Nutrition Assistance Program (SNAP) over the next decade.
With Democrats controlling both chambers of Congress, some of these reductions could be delayed, softened or reversed as part of negotiations around upcoming fiscal deadlines.
The size of the Democratic majority could also help lawmakers overcome disagreements within their party and unite around a limited set of policy priorities.
Despite the potential changes, we think federal fiscal deficits will remain around 6% of GDP, even if the spending cuts remain in place.
2. Executive-Led Policy: Uncertainty Likely to Persist
Much of the policy uncertainty that has marked President Donald Trump's second term has stemmed from executive actions rather than legislation.
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 (USMCA).
As a result, investors should expect continued policy uncertainty, particularly in areas where the administration retains substantial executive authority.
3. AI Infrastructure: Greater Risk of Data Center Restrictions
The election results could introduce additional challenges for AI infrastructure investment, especially as newly elected state officials consider restrictions on data center development.
Decisions governing data center projects—including grid interconnection, electricity rate structures for large users, site selection and tax abatements—are largely determined by state utility commissions, legislatures and county boards.
Additional state-level regulations could create a more fragmented environment, with some jurisdictions remaining receptive to new data centers while others impose tighter restrictions.
The Texas gubernatorial election is particularly significant for the industry. Democrat Gina Hinojosa's victory increases the likelihood of substantial project delays, given that her campaign platform included a moratorium on new data center approvals.
Although these developments could weigh on near-term AI sentiment, Morgan Stanley Research expects the broader AI capital expenditure (capex) cycle to remain intact.
U.S. Could See Improved Economic Growth
Looking beyond these policy shifts, we maintain our outlook for resilient U.S. economic growth and continued disinflation—and we see the election results as a potential source of additional upside to growth.
Delaying or reducing planned Medicaid and SNAP cuts could support household finances and consumer spending, providing a modest boost to economic activity. Delays could also modestly increase Treasury issuance in the two- to seven-year maturity range.
Overall, however, Democratic control of both chambers of Congress effectively rules out a Republican-led budget reconciliation bill when the new Congress convenes in January. This removes the primary source of upside risk to the U.S. Treasury's borrowing requirements.
Here’s a look at our current view across asset classes.
