As the U.S. midterm elections approach in November, Wall Street is beginning to reassess the potential impact of the election results on financial markets. If Democrats regain control of Congress, will the Trump administration's economic policies shift? How long can U.S. fiscal stimulus be sustained? And will the rapidly expanding AI data center investment slow down due to political pressure?

Morgan Stanley noted in its latest analysis that this midterm election could change the power structure of Congress, but may not necessarily alter the fundamental direction of U.S. economic policy. Rather than the election results themselves, investors should focus more on the continuity of fiscal policy and the increasing regulatory constraints surrounding artificial intelligence and data center construction.

Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley, believes that the midterm elections are unlikely to change the Trump administration's core policy agenda, which is dominated by executive power. Even if Democrats win the House, or even control both the House and Senate, policies on tariffs, trade, immigration, and deregulation could still advance through executive departments and federal agencies.

But an unchanged policy direction does not mean markets will be unaffected. Morgan Stanley believes that post-election fiscal negotiations could become more complex, and AI infrastructure investment could also face more restrictions from state and local governments.

What Can the Midterm Elections Change? Congressional Control and Policy Direction May Not Move in Sync

The most direct impact of the midterm elections is determining the political landscape of the U.S. Congress for the next two years. However, Morgan Stanley points out that even if congressional control changes, it does not mean the Trump administration's existing policies will be overturned.

First, divided government will make major legislation more difficult.

If Democrats win the House, or control both chambers, the Trump administration will face greater resistance in pushing new large-scale fiscal bills. The budget reconciliation process previously used to advance major fiscal legislation will also be difficult to use when congressional power is fragmented.

At the same time, even if Democrats control both chambers of Congress, the president still holds veto power over legislation. This means Democrats will likewise find it difficult to unilaterally push through large-scale policy changes opposite to the current administration's direction.

Second, many of the Trump administration's core policies do not entirely depend on congressional legislation in the first place.

Morgan Stanley notes that tariffs and trade, deregulation, immigration, and some geopolitical policies are mainly implemented through executive departments and federal agencies. Therefore, even if congressional control changes, these policies may continue.

However, the election results could still change the political environment for policy implementation.

If a divided government takes shape, congressional oversight of the president and the executive branch may intensify, and the executive branch's role in policy implementation will become more prominent.

In other words, what the midterm elections are most likely to change is the difficulty of passing new policies, the intensity of congressional oversight, and the way the executive and legislative branches engage in political maneuvering—not an immediate rewrite of U.S. economic policy.

Fiscal Policy in Focus: Stimulus Hard to Expand, Debt Disputes May Heat Up

On economic policy, fiscal matters are one of the most closely watched areas in the midterm elections.

Morgan Stanley believes that although fiscal policy is more susceptible to changes in congressional control, the election results are unlikely to lead to a fundamental adjustment in the direction of U.S. fiscal policy.

The reason is that both parties lack strong incentives to push for large-scale cuts in government spending or tax increases. Therefore, even if the congressional political landscape changes, the existing U.S. fiscal policy framework is likely to continue.

However, a divided government could make it harder for new fiscal support measures to pass.

Without the support of the budget reconciliation process, advancing large-scale fiscal stimulus bills in Congress will become more difficult. At the same time, issues such as government funding, the debt ceiling, and the defense budget may trigger more intense partisan negotiations.

This issue is particularly prominent against the backdrop of the continued expansion of U.S. debt.

According to a Morgan Stanley article, U.S. federal debt exceeded $40 trillion for the first time in August 2026. As the debt burden increases, uncertainty surrounding government financing arrangements and fiscal policy may rise further.

However, Morgan Stanley believes that political disputes over the budget and the debt ceiling may be more significant than actual fiscal policy adjustments.

From a financial market perspective, tariffs, taxes, and deregulation will remain important drivers.

Morgan Stanley's research team noted that since January 2025, rising U.S. policy uncertainty and related market volatility have mainly come from the executive branch rather than congressional legislative action. This means that even if the midterm elections change the congressional landscape, investors still need to focus on the actual policies of the White House and federal agencies.

Historical market performance also provides a reference.

Research from Morgan Stanley Wealth Management's Global Investment Office shows that under a Republican president with Congress split between the parties, the S&P 500 rose an average of 23% in the year after the midterm elections; under a Republican president with Democrats controlling Congress, the average gain was 15%.

But Morgan Stanley cautions that a divided government cannot be simply equated with stock market gains. The current U.S. economy and financial markets are significantly affected by fiscal stimulus, tax and regulatory policies, and if these policies undergo substantive changes, they could also alter the previous trend of stock market gains spreading to more sectors.

Therefore, for investors, what truly matters is not which party controls Congress, but whether fiscal policy can continue to support U.S. economic growth, and whether political wrangling will affect policy implementation.

AI Becomes a Bipartisan Focus: Data Center Construction May Face More Restrictions

Beyond fiscal policy, AI infrastructure construction is becoming an important policy issue in the midterm elections.

Morgan Stanley believes that, unlike traditional economic policies such as tariffs and taxes, the political pressure facing AI data center construction has a distinctly local character. Even if the policy direction in Washington remains unchanged, state and local governments may still exert substantive influence on AI investment through energy management, project approval, and community protection measures.

Currently, disputes surrounding data centers have crossed party lines. States governed by both Democrats and Republicans have begun to focus on the potential electricity cost increases, infrastructure burdens, and community interest issues that large-scale data centers may bring.

The state governments of New York, Virginia, and Texas have already adopted executive orders, policy frameworks, or review measures to reassess the impact of data center development.

Morgan Stanley summarizes this trend as "conditional buildout." This does not mean that the United States will stop AI infrastructure investment, but rather that whether future data center projects can materialize will increasingly depend on whether developers can meet the requirements set by local governments.

Specifically, local governments may require data center operators to bear more of the added electricity costs, participate in infrastructure construction such as power grids, accept new tax or utility arrangements, and take measures to mitigate the impact of projects on local communities.

These conditions may increase project development costs and may also change the distribution of AI investment across different regions.

Nevertheless, Morgan Stanley still expects AI infrastructure investment to remain at a large scale. Its research team predicts that capital expenditure by hyperscale cloud computing companies will reach $1.5 trillion in 2027.

At the same time, power supply has become an important factor constraining U.S. data center expansion. Morgan Stanley previously predicted that by 2028, the power supply gap facing U.S. data center developers could exceed 30%.

Policy debates surrounding AI buildout have thus produced two forces: local governments want to control energy costs, infrastructure burdens, and community impact; while supporters of continued AI infrastructure expansion emphasize national security and US-China tech competition, arguing that excessive restrictions on data center construction could weaken America's long-term competitiveness.

Morgan Stanley believes that federal-level AI legislation may advance slowly, and a nationwide moratorium on data center construction is unlikely. By contrast, state and local governments will continue to play an important role in the specific project approval process.

This means the impact of the midterm elections on the AI industry may not manifest as a sudden shift in federal policy, but rather in differences in construction conditions, development costs, and investment progress across different regions.

After the midterm elections, what should the market watch?

Morgan Stanley believes investors should not simply view divided government as a bullish signal for stocks, nor should they judge long-term trends solely based on short-term market reactions after the elections.

Jim Caron, Chief Investment Officer at Morgan Stanley Investment Management, noted that the current US market is significantly influenced by fiscal policy, tax policy, and the regulatory environment. If relevant policies reverse, the market's previous broadening rally could also be affected.

Monica Guerra, Head of Policy and Geopolitical Strategy at Morgan Stanley Wealth Management's Investment Office, believes that congressional political gridlock and legislative stagnation can sometimes bring policy stability. Compared with short-term volatility triggered by political news, investors should pay more attention to the actual policy actions taken by the government.

For companies, a divided Congress does not mean the policy environment remains static. Josh Wilsusen, Head of Government Relations at Morgan Stanley, warned that companies still need to contend with changes in congressional oversight intensity, continued enforcement of existing policies by federal agencies, and the growing influence of state and local governments over AI infrastructure buildout.

Based on Morgan Stanley's analysis, the impact of the 2026 US midterm elections on financial markets is mainly concentrated in two aspects.

First, whether fiscal policy can maintain continuity. Even if congressional control changes, existing tax, tariff, and fiscal policies may continue, but new fiscal stimulus measures may be harder to introduce, and government funding and debt ceiling negotiations could also increase market uncertainty.

Second, what new constraints AI investment will face. Tech giants' capital expenditure plans remain massive, but data center construction is being affected by factors such as energy supply, local regulation, and community costs. A divergence may emerge between future investment scale and the actual pace of project implementation.

Therefore, Morgan Stanley's core judgment is: the midterm elections may change the political landscape of the U.S. Congress, but may not necessarily change the fundamental direction of economic policy. The continuity of fiscal policy, as well as the process of AI infrastructure investment transitioning from large-scale expansion to conditional construction, are the market variables worth continuous attention after the election.

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