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What the Midterms Could Change
Oct 14, 2026
For investors and companies, the biggest questions coming out of the November midterms will be how the outcome influences fiscal policy and how the growing political debate around AI and data centers affects the next phase of the buildout.
Jessica Alsford
Head, Morgan Stanley Institute
Why It Matters
- Change in control of Congress wouldn’t necessarily mean a resultant major change in policy from Washington. Divided government would make major legislation more difficult, and many priorities in trade, deregulation, immigration and foreign policy could continue through the executive branch and federal agencies.
- Fiscal policy trajectory would also likely remain unchanged. Even a change in congressional control is unlikely to drive a material shift.
- The AI buildout is likely to continue, but with more conditions. State and local governments will likely become more important in steering AI policy, particularly around data center development, in what Morgan Stanley Research terms a conditional buildout.
The Big Picture: The upcoming midterm elections could change who controls Congress, but without a significant change in national policy as a result. Three areas stand out to watch: what could actually change in Washington, the outlook for fiscal policy, and how state and local governments are playing a larger role in shaping AI investment.
The upcoming U.S. midterms in early November could change the makeup and control of Congress, particularly with affordability as a key issue for voters and backdrop for the election. Yet the results won’t necessarily lead to a major shift in the broader policy direction from Washington, according to experts from across Morgan Stanley. The “midterms are unlikely to change the core executive-led policy agenda,” Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley, said on a recent episode of Thoughts on the Market.
Much of the Trump administration’s agenda can continue without meaningful new legislation or action from Congress. For investors and business leaders, the areas that deserve closer attention are market considerations connected to fiscal policy and how artificial intelligence and the data center buildout will proceed with the increased likelihood of conditions from state and local governments.
1. Changing control of Congress may not mean a major change in policy.
Even if the Democrats gain control of House, or both the House and Senate, a divided government would make it difficult to pass large, partisan legislation. One important reason is that reconciliation—the principal vehicle used to advance large-scale fiscal legislation with a simple Senate majority—wouldn’t be feasible if control of Congress changes or is split. The president can also veto legislation even with Democratic majorities in both the House and Senate.
Much of the Trump administration’s current agenda on deregulation, tariffs and trade policy, immigration and geopolitics is being implemented through the executive branch and federal agencies. Even if congressional control changes as a result of the midterms, these policy trajectories would continue.
What could change with a divided government following the midterms is that congressional oversight could become more aggressive, particularly towards the president, and agencies could take on a greater role in policymaking.
2. The trajectory of fiscal policy, and important market considerations, will likely remain unchanged.
Although fiscal policy is more sensitive to the outcome of the midterms, they’re unlikely to result in a broader shift, particularly since neither party has much incentive to enact significant fiscal change through spending cuts or tax increases.
Legislatively, without reconciliation large-scale fiscal support would become more difficult to pass Congress, and negotiations over government funding, the debt ceiling and defense spending will likely come into focus and become more contentious and uncertain under a divided government. More noise around government funding and the debt ceiling—with U.S. debt rising past $40 trillion for the first time in August—is more likely than actual change.
Likewise, from a markets perspective, key recent market drivers such as tariffs, tax policy and deregulation would remain broadly in place, even with a shift in Congress. Tariffs are an established factor for markets, tax policy has largely been set, and much of the administration’s deregulatory infrastructure, primarily implemented by appointed officials, is already in position. “Since January 2025, instances of elevated policy uncertainty (and associated market volatility) were tied to executive, rather than legislative, action,” Morgan Stanley Research recently noted. Strong U.S. nominal growth has been supported by fiscal policy and deficit-financed stimulus.
Average S&P 500 performance was strongest in the year following midterm elections with a Republican president and a split Congress, at 23%, as the Morgan Stanley Wealth Management Global Investment Office recently reported. With a Republican presidency and a Democratic Congress, average performance in the year after midterms was 15%.
3. The AI buildout will likely continue, but with more conditions, even if the midterm elections reflect voter unease.
The current bipartisan political issue of artificial intelligence and data centers underscores how the most notable policy developments following the midterms may come from state and local governments, and not from Congress.
At the state and local levels, however, the debate around data centers is focused on moratoriums, energy costs and community concerns. New executive orders, frameworks and audits from governors in New York, Virginia and Texas underline that this dynamic of data center development with conditions is evident across red and blue states.
“We think the election can have meaningful consequences, but on a highly localized basis, supporting our base case for a conditional buildout” with respect to data centers, Ariana Salvatore recently wrote. This would preserve “the expected levels of capex but only in certain regions contingent upon community engagement or other mitigation measures.” A conditional buildout is still substantial—Morgan Stanley Research forecasts $1.5 trillion of hyperscaler capex in 2027.
In the future, a potential middle ground could emerge in which data center developers are asked to absorb energy costs, help fund new infrastructure, accept different tax and utility arrangements or address specific community concerns. As a result, agreements between state governments and data center operators could have implications for utilities, infrastructure, transportation and other sectors that stand to benefit from AI investment.
At the national level, budding arguments for the continued AI buildout center on national security concerns and strategic competition with China, and that restrictions on data centers could undermine U.S. competitiveness in the longer term, particularly in light of looming power and compute constraints. Morgan Stanley Research recently forecast that U.S. data center developers will face a power shortfall of more than 30% through 2028.
Federal legislation on AI, meanwhile, is likely to move more slowly, according to Morgan Stanley Research and experts from across the Firm, and a national pause is unlikely. State and local governments will remain more influential in decision-making that can directly affect AI projects.
Takeaways
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For Investors:“I’d caution against the assumption that divided government is automatically positive for markets. While that has historically been a common narrative, the current market environment has been unusually driven by fiscal policy, tax policy and regulation. A reversal of these could reverse the market broadening trend we’ve seen. Rather than reacting quickly, investors should assess longer-term policy implications and then determine which companies, sectors and industries are most likely to be affected, instead of extrapolating the first market reaction.”
Jim Caron, Chief Investment Officer, Portfolio Solutions Group, Morgan Stanley Investment Management
“It’s important to remain disciplined, even when Congress appears to be in tumult. That political infighting and lack of action can actually result in market stability. Focus on what state and local governments are actually doing, for example, and not the headline noise. It’s key for clients to stay close to their advisors and work with them to identify opportunities rather than make changes based on political headlines or pockets of headline-related volatility.”
Monica Guerra, Head of Policy and Geopolitical Strategy, Wealth Investment Office
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For Companies:“A divided government may result in less major legislation, but that doesn’t mean policy stops. Companies should prepare for evolving congressional oversight, continued action through federal agencies and in areas like AI infrastructure, increasingly important decisions being made at the state and local levels. On AI, the anti-data center coalition has dominated the narrative so far, but expect the technology community to develop a counter-narrative. There’s still potential for bipartisan common ground.”
Josh Wilsusen, Head of Government Relations
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