Key Takeaways
Democratic wins in state-level contests, particularly in Texas, may result in stricter data center regulations and project delays, though the broader cycle of AI investment is anticipated to remain steady.
A shift in congressional control could potentially soften or delay planned reductions in SNAP and Medicaid spending, which may bolster consumer spending and overall economic expansion.
Morgan Stanley Research maintains an overweight stance on global equities, driven by strategies are expected to persist, while potential shifts in AI regulation and healthcare policy could impact the performance of specific sectors.
Democrats secured majorities in both chambers of the U.S. Congress during the midterm elections and also claimed gubernatorial victories in states traditionally held by Republicans. These outcomes prompt questions regarding potential policy pivots and their subsequent effects on financial markets, asset classes, and economic growth.
For those in the markets, a primary concern is the possibility of increased restrictions on data center construction, which could dampen sentiment regarding AI investment. Conversely, Democratic control of Congress may provide a tailwind for the healthcare sector and consumer spending by offering opportunities to revisit scheduled cuts to federal food assistance and healthcare programs.
We have identified three primary policy areas to monitor in the near term as foundational themes leading into the 2028 election, along with their potential market implications.
1. Fiscal Policy: Potential Changes to Medicaid and SNAP Cuts
The One Big Beautiful Bill Act (OBBBA) encompasses roughly $900 billion in Medicaid spending cuts and $200 billion in reductions to the Supplemental Nutrition Assistance Program (SNAP) over the next ten years.
With Democrats now holding both chambers of Congress, some of these planned reductions could be softened, delayed, or even reversed during negotiations surrounding upcoming fiscal deadlines.
The scale of the Democratic majority may also assist lawmakers in bridging internal party divides and coalescing around a specific set of policy goals.
Despite these potential adjustments, we anticipate that federal fiscal deficits will hover near 6% of GDP, even if the original spending cuts remain in place.
2. Executive-Led Policy: Uncertainty Likely to Persist
Much of the policy ambiguity characterizing President Donald Trump’s second term has been driven by executive actions rather than legislative mandates.
Democratic control of Congress is unlikely to fundamentally alter the administration’s stance on trade, deregulation, export controls, and geopolitics, including the pending review of the United States-Mexico-Canada Agreement (USMCA).
Consequently, <a s race—could trigger some short-term fluctuations. Nevertheless, this uncertainty might represent the final phase of the market pullback that began over the summer. Other risks to monitor include new U.S. tariffs and renewed military conflict involving Iran.
Investment Strategy: Global Stocks Remain Favored
Following the midterms, we continue to favor global equities over core bonds—maintaining an overweight position in stocks and an underweight position in core fixed income. We anticipate that ongoing AI investment will bolster corporate earnings and support global stock markets, including those in emerging markets and Europe.
Our outlook for bonds remains largely unchanged. We expect corporations to continue borrowing heavily to finance digital infrastructure, even as investors become somewhat more cautious regarding AI. Beyond AI, concerns regarding government debt in other nations and oil prices continue to influence bond yields, stock prices, and the correlation between the two—and the U.S. election does not alter this dynamic.
FX: Defensive Currencies Could Benefit
Currency markets are likely to reflect uncertainty surrounding AI investment, increased congressional pushback against renewed geopolitical conflict, and a heightened risk of targeted trade measures.
In the near term, we expect currencies to follow a defensive trend: the Swiss franc, Japanese yen, and euro could strengthen against the U.S. dollar, while the Australian dollar may lag, as it tends to track investor sentiment regarding AI-driven stocks.
U.S. Healthcare Services: Potential Support for Medicaid-Focused Insurers
Investors in health insurers with a focus on Medicaid are likely to view the Democratic sweep favorably, while the reaction among more diversified insurers may be more muted.
With control of Congress, Democrats will have more leverage to advance healthcare priorities, such as rolling back parts of Republican Medicaid cuts—including work requirements—and restoring enhanced Affordable Care Act (ACA) subsidies. Major healthcare legislation remains unlikely before the next presidential election, but the results could shift the discourse, especially as several key proponents of the Trump administration’s healthcare agenda have departed.
