As investors look toward the U.S. midterm elections, the biggest question is what could change. Our Head of U.S. Public Policy Research Ariana Salvatore outlines the signals worth watching.
Read more insights from Morgan Stanley.
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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.
Today, I'll be talking about the upcoming 2026 midterm elections.
It's Wednesday, September 30th, at 10am in New York.
As the elections inch closer, investors are increasingly asking about potential ramifications. We just put out a deep dive covering our expectations, and we arrive at four key takeaways.
The first, midterms are unlikely to change the core executive-led policy agenda. As we've been noting for some time, a lot of the policy uncertainty that markets have dealt with since the beginning of 2025 has actually come from the executive branch rather than Congress.
Tariffs, trade policy, deregulation, immigration, and export controls are all variables that are going to remain within the White House's authority. So even if control of Congress changes, we don't think investors should assume that those parts of the policy agenda simply go away. Where Congress actually matters more is on fiscal policy. But even there, the range of outcomes is relatively narrow.
The main differences revolve around the timing of scheduled SNAP and Medicaid cuts, defense spending, and how future government funding and debt limit negotiations evolve.
So, that's our first takeaway. Midterms can change the mechanics of governing, but probably not the broader direction of the executive agenda. That means policy uncertainty, at least across those vectors I mentioned, is likely to stay high.
Takeaway number two, we'd be careful about treating the midterms as a direct signal for the 2028 presidential election. Historically, what we see is the issues that dominate a midterm don't necessarily translate to the next presidential race.
Looking at the six midterm-to-presidential cycles since 1994, the top-ranked issue changed in five of them. And the issue that ultimately proved decisive in the presidential election was actually already visible at the midterm in only two of the six cases. What elections can tell us, however, is where some of the policy fault lines are beginning to form.
We're watching four debates in particular in that context: the fiscal and Social Security debate, individual tax landscape, restrictions on data center development, and healthcare. In our view, across those variables, the useful signal isn't simply which party wins more seats. It's which versions of these policies are beginning to gain traction with voters and within the parties themselves.
That actually brings us to takeaway number three. AI is one area where the midterms could matter, but mainly through data center policy rather than broad AI regulation.
We think it's important to separate those two issues. So first, on data centers, we do see midterms as a catalyst. And that's because many of the most important policy levers sit at the state and local level: permitting, siting, grid interconnection, large load electricity rates, and tax incentives. So that means that the governorships, utility commissions, and state legislatures can actually have a much more immediate effect on the pace and the location of the build-out than Congress itself.
In that vein, our base case remains a conditional build-out, meaning the expected level of AI CapEx can continue. But likely it's going to increasingly concentrate in locations where developers can address concerns around things like electricity costs, infrastructure, water, and community impacts.
Broader AI safety regulation is different. Here, we think government configuration actually matters less, and that's because we see comprehensive federal legislation as pretty unlikely in the near term, absent a high salience event or incident. So congressional control is not necessarily the key driver.
And finally, takeaway number four: for markets, we see more micro implications than macro ones. For equities, the composition and cohesion of the congressional majority can matter for individual sectors. Congress that's able to negotiate changes to scheduled SNAP or Medicaid cuts, for example, could have implications for consumer and healthcare companies.
AI related sectors could also respond to changes in expectations and sentiment pertaining to data center restrictions. For rates, the key question is whether the election produces fiscal outcomes that materially change expected deficits.
United Republican control would be the only outcome preserving reconciliation as a potential vehicle. Divided government, conversely, would narrow the scope for new legislation and put more emphasis on funding and debt limit negotiations. And for the dollar, our strategists see the transmission mechanism running primarily through U.S. yields and the growth outlook rather than the election itself.
So, bottom line, we don't think the 2026 midterms are likely to produce a wholesale change in the policy or macro backdrop. But there will be important lessons to pick up along the way.
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