11.10.26 - What the new Congress could mean for the stock market

Bradford Pineault · Fidelity Investments

Immediate capex expensing is an AI tailwind; repeal unlikely given veto risk, with little tax change expected.

The One Big Beautiful Bill Act made immediate expensing of capital expenditures permanent, so companies can write off equipment fully up front. Pinnell says this has been a tailwind for companies investing in AI because the government is incentivizing that spending. Repeal is possible, but he doubts it will happen because it would have to pass the president's desk and could face a veto. He sees little that this Congress can do on taxes in either direction.

“It's been an incentive. It's been a tailwind for companies certainly in the AI space to put money to work here because the government inducing you, right, is incentivizing to do it.”at 18:51

Greg Lowman · Fidelity Investments

Divided Congress can't pass tax hikes over a veto; progressive tax proposals may come in 2029.

Reversing the administration's tariff, trade and energy policies was the mandate of this election. Lohman doubts that Congress can override a presidential veto or get enough Republicans to pass a filibuster-proof bill raising taxes on individuals or corporations in the next two years. It could, however, seed proposals for 2029 if a Democratic administration takes power, which would require a clear-eyed look at progressive tax policy to shore up the fiscal situation.

“I don't see, to Brad's point, the ability to overcome a presidential veto or to get enough Republicans to join in on a filibuster busting senate bill that raises taxes on any level of individual or corporation in the next two years. But it certainly could seed proposals for 2029”at 19:50

Greg Lowman · Fidelity Investments

Expect a stopgap funding bill past December 11, pushing spending decisions into early 2027.

Government funding runs out December 11, and Lohman says the question is whether Congress passes a status-quo continuing resolution and leaves the rest to the new Congress in early 2027, or tries to lock in longer appropriations. He says all signs point to a continuing resolution that pushes the decision into the next session, partly because the holidays and members who lost races make a longer deal harder.

“All signs sort of point to a CR that just pushes it into the next season.”at 27:45

Greg Lowman · Fidelity Investments

Cutting discretionary spending cannot close the deficit; mandatory programs are the real driver.

Of the roughly $2 trillion deficit, only 14% is nondefense discretionary spending, about $800 billion. Lohman says even shutting down large parts of the government, as DOGE attempted to cut, would barely dent the deficit. That is why mandatory programs such as Social Security, Medicare and Medicaid are critical to addressing it.

“We have a situation with a $2,000,000,000,000 deficit where only 14% of it is nondefense discretionary spending... those mandatory spending initiatives from Social Security, Medicare, and Medicaid are to getting at this crisis.”at 21:32

Bradford Pineault · Fidelity Investments

Debt is less alarming than media suggests; public debt is about 1:1 with GDP and growth can fix it.

Of roughly $40 trillion in total national debt, about $32 trillion is held by the public. The remaining $8 trillion is intragovernmental, such as Social Security trust funds. Public debt is about equal to nominal GDP, a ratio near one-to-one. Pinnell argues the ratio is sustainable only if GDP grows faster than debt, and that AI-driven productivity could expand the denominator. He compares this to judging a mortgage relative to the value of the home.

“we don't necessarily believe that the debt is as much of a call for concern that maybe the media likes to talk about... we have to grow GDP faster than we grow the debt level.”at 24:17

Greg Lowman · Fidelity Investments

Debt ceiling likely binds around Q2 2027; tough fight, but default unlikely.

Lohman expects the debt ceiling to need raising around the first or second quarter of 2027, more likely the second. He calls it a very tough negotiation with many pitfalls, since the US has never defaulted. He believes enough adults will be in the room to prevent default, but the leverage each party thinks it has will shape the fight.

“that is gonna have to be raised, and I would call it q one, q two, probably more likely q two of twenty seven... And that is going to be a very tough negotiation... I think enough adults will be in the room to make sure we do not default on our obligations”at 28:25

Bradford Pineault · Fidelity Investments

Compute demand looks robust; the AI trade isn't over, just more volatile after data-center uncertainty.

The sell-off after the election was partly driven by concerns that the new Congress and state officials might tighten data-center rules, which briefly pushed the Nasdaq toward correction. Pinnell argues demand for AI compute looks like it could stay robust, so the AI story is digesting uncertainty rather than ending. He says that uncertainty means more volatility, not that the AI trade is over. He adds that AI fundamentals are still improving, with hyperscaler capex and demand commentary to watch each quarter.

“the demand for compute around AI looks like it could continue to remain robust, and that tells us that this AI story is just digesting uncertainty... We don't believe that uncertainty means that the AI trade is over. It just means that it could be more volatile going forward.”at 4:01

Greg Lowman · Fidelity Investments

Data-center backlash will be settled mainly at state level for now; federal action possible later.

Lohman says 40 of 41 ballot initiatives opposed data-center buildout or AI-related policy, and roughly 56% of exit polls showed voter dissatisfaction tied to AI and data-center growth. Washington is not changing course, since the administration continues with light-touch AI regulation. He argues that state governors and legislatures will decide zoning, permitting and energy-use policy. Federal action remains possible through future legislation or a crisis. Affordability is the underlying concern, since rising compute demand could raise energy prices and prompt ratepayer-protection proposals.

“40 of those 41 initiatives oppose some form of data center build out or AI related policy... where this lands in the state related efforts by governors and state legislatures seems much more pertinent to where zoning, permitting, and energy use policy goes.”at 4:59

Bradford Pineault · Fidelity Investments

Earnings, not politics, will dictate the market's path; the new Congress matters only through earnings.

Pinnell says the team focuses on fundamentals and that stock prices reflect earnings. Earnings have been trending higher, and he believes they will continue to guide the path forward. The key question for the next Congress is how far it could influence earnings. He notes that politics can add volatility, but he is focused on whether the earnings outlook stays strong.

“we're all about the earnings, the fundamentals generically. Stock prices reflect earnings... what we're really looking forward with this new Congress is to what extent... could that have influence over the earnings”at 2:38

Bradford Pineault · Fidelity Investments

Gradual, pragmatic Fed tightening signals a stronger economy; higher rates aren't deterring activity.

With sticky inflation and a possibly hawkish Fed, Pinnell argues that a Fed tightening as gradually and pragmatically as it is can coincide with a stronger economy rather than a weaker one. He argues higher rates and yields have not been a deterrent to economic activity.

“a Fed that is tightening as glacially and pragmatically as they are could be synonymous with an economy that's stronger, not weaker. Right? Arguably, higher rates, higher yields are not a deterrent to economic activity.”at 3:07

Greg Lowman · Fidelity Investments

Administration will keep federal AI development largely unregulated despite voter backlash.

Despite voters' expressed dissatisfaction with AI and data-center growth, Lohman says the administration is more of the same, with unfettered regulation of AI development. He sees state-level action as more relevant for zoning and energy policy, with federal action only likely later.

“this administration is more of the same with respect to their unfettered regulation for the development of AI.”at 5:18

Bradford Pineault · Fidelity Investments

Gridlock is market-friendly; 2027, year three of the presidential cycle, should be a decent year.

Pinnell's team uses the slogan 'gridlock equals guardrails.' Divided government makes significant legislation unlikely, and midterms act as clearing events that reduce uncertainty. He cites history: since 1942 there has been no down twelve-month period after a midterm. Year three of the presidential cycle has historically been the strongest of the four years, with guardrails making major fiscal changes unlikely. He expects 2027 to be a decent year despite the noise, while stressing that historical patterns are not guarantees.

“gridlock equals guardrails... if you go back to '42, there has not been a down twelve month period, Heather, post midterm... year three of a presidential election cycle... tends to be the very best year”at 6:54

Bradford Pineault · Fidelity Investments

Economy remains buoyant; no recession in sight, and 2027 unlikely to slow significantly.

Pinnell argues the economy is still vital and growing, with strong labor markets and sticky inflation. Historically there have been no recessions in year three of a presidential term back to the 1940s, and he says the buoyant economic variables going into the midterms would make it a challenge for 2027 growth to decelerate significantly. He concedes that no outcome is guaranteed.

“We don't see a recession for as far as our eyes can see... in 2027, it would be a challenge to see that alter or or or decelerate in a significant way.”at 9:38

Greg Lowman · Fidelity Investments

Divided government can shift affordability costs only at the margins, via must-pass bill leverage.

The incoming majorities plan to focus on affordability across health care, energy costs (through ending the Iran war) and restoring ACA subsidies and Medicaid cuts. Lohman says divided government can do only so much to bend the cost curve, since real change depends on negotiating grand bargains around must-pass bills such as government funding or the debt ceiling, where Democrats may have leverage.

“And I think that's the reality right now of a divided government is basically pretty much just on the margins... I think they're gonna have leverage in certain elements of these three buckets.”at 11:30

Greg Lowman · Fidelity Investments

Congress may push to stop Canada tariffs, but a two-thirds veto override makes it hard.

Lohman says the message on Canada tariffs was loud and clear, and the incoming Congress could pass a bill to stop them. Tariff policy is still more of a patchwork for the rest of the world, particularly China, where it can remain effective. Passing such a bill would require overriding a presidential veto, which needs two-thirds majorities in both chambers. He is unsure whether the votes exist, and whether the president will seek a trade deal first.

“We're gonna pass a stop the tariffs and trade bill on Canada's, on that policy for sure... Do they have enough votes to overcome a presidential veto? You need two thirds in both bodies”at 12:07

Bradford Pineault · Fidelity Investments

Oil shock from the Hormuz closure keeps inflation elevated; expect disinflation, not deflation.

Pinnell says affordability is rooted in post-COVID inflation, and prices only fall if inflation turns into deflation. Elevated oil prices from the Strait of Hormuz closure, a supply shock with an unknown end date, keep the picture messy. He expects disinflation, meaning inflation slows but stays high, so affordability remains a problem.

“What's happening with oil in the Strait Of Hormuz closure is obviously keeping things... messy... we're probably just going to see disinflation where inflation still remains high, affordability still remains an issue.”at 14:10

Bradford Pineault · Fidelity Investments

Consumer spending stays resilient as wealthy net savers and asset holders offset strained households.

Consumers are unhappy about affordability, but Pinnell says the economy is an aggregate of many consumers. Some households are squeezed by inflation and rates, while others are net savers who benefit from higher yields and stock-market gains. He points to packed restaurants and airports, retail sales trending higher, and household net worth that has roughly doubled in a decade to about $100 trillion (partly inflation). He sees this wealth effect supporting spending at the top of the income distribution.

“the economy is not one consumer, right? It is the aggregation of many consumers... there are plenty that might have money in the markets, right, who actually are net savers, who appreciate higher rates”at 14:46

Bradford Pineault · Fidelity Investments

Labor market is in good shape, with strong jobs data, upward revisions and 4.1% unemployment.

Friday's jobs report was strong and included a strong upward revision to the two prior months. Pinnell points to 4.1% unemployment as a sign of a labor market that remains buoyant, and he argues that this supports a decent economy and the fundamentals of S&P 500 companies.

“You mentioned the strong jobs number that we saw on Friday, and we saw a strong revision to the two prior months. Those numbers don't lie. The labor market is in a good position... you have a 4.1% unemployment rate, which is emblematic of a labor market that continues to remain buoyant.”at 16:20

Greg Lowman · Fidelity Investments

Congress unlikely to tackle entitlements; a 23% Social Security cut looms by 2032.

Lohman says the debt problem depends heavily on mandatory programs such as Social Security, Medicare and Medicaid. He cites a potential 23% annual cut to Social Security benefits in 2032. Changing entitlements is unpopular, and he expects bipartisan proposals to surface but says Congress usually reaches resolution only in eleventh-hour negotiations. He thinks entitlement reform is not on this Congress's agenda, particularly heading into a presidential election, when cutting benefits is not a way to win senior votes.

“in 2032, we're hearing 23% potential annual cut to benefits for Social Security... entitlement spending right now, I don't think is on the agenda of this congress, particularly going into a presidential election cycle”at 22:28