Will Midterms Test the AI Investment Cycle?

Ariana Salvatore · Morgan Stanley

Morgan Stanley's base case is a substantial but conditional AI data center buildout, constrained by power, siting, permitting and community factors.

Base case is a conditional but still substantial AI infrastructure buildout. No broad federal pause is expected because Washington increasingly treats AI compute as strategic infrastructure amid competition with China, and that national security framing supports the buildout. The conditions (power costs, grid investment, siting, permitting, water use, community impact) add friction at the state and local level, but the strategic case for expanding US compute capacity remains intact.

“Our base case is still a conditional build out. We still expect substantial AI infrastructure investment, but increasingly subject to conditions around things like power costs, grid investment, siting, permitting, water use, and community impact.”at 0:55

Ariana Salvatore · Morgan Stanley

State governors, legislatures and utility commissions may matter more than any single Senate seat for AI data center buildout.

Many of the levers that can delay data center projects (interconnection approvals, large-load electricity tariffs, zoning, water permits, tax abatements) sit with states, utility commissions, and local governments. Governors, state legislatures, and public utility commissions may therefore matter more than control of any single Senate seat. Under divided government, DC gridlock would leave substantive decisions at the state and local level, preserving questions about the durability of the buildout.

“When it comes to AI infrastructure, we actually think governors, state legislatures, and public utility commissions may ultimately matter more than control of any one senate seat in particular.”at 1:43

Ariana Salvatore · Morgan Stanley

A Republican sweep would be the most constructive midterm outcome for AI data center infrastructure sentiment.

A Republican sweep would likely be the most constructive outcome for AI infrastructure sentiment because investors would expect fewer regulatory constraints, a greater likelihood of active support for permitting reform, additional power generation, and development on federal land.

“At the federal level, we think a Republican sweep would likely be the most constructive outcome for AI infrastructure sentiment.”at 1:57

Ariana Salvatore · Morgan Stanley

A Democratic sweep would be the least constructive midterm outcome for AI data center sentiment, raising odds of local restrictions.

A Democratic sweep would be the least constructive outcome for AI infrastructure sentiment. She does not expect a nationwide moratorium, but investors could read Democratic outperformance as raising the probability of tighter local restrictions in the near term and potentially much more federal scrutiny after the 2028 elections.

“We think a democratic sweep would be the least constructive outcome for sentiment. Now importantly, that doesn't mean that we expect a nationwide data center moratorium... investors could interpret democratic outperformance as increasing the probability of tighter local restrictions in the near term.”at 2:28

Ariana Salvatore · Morgan Stanley

The midterms won't decide whether AI capex continues, but can affect buildout friction, timing, costs and investor confidence.

The midterms probably won't determine whether the AI investment cycle continues, because the strategic case for expanding US compute capacity remains intact. What elections can influence is the friction around the buildout: where projects get built, how quickly they are approved, who bears the cost, and investor confidence in the durability of AI capex.

“The midterms probably won't determine whether the AI investment cycle continues. We think the strategic case for expanding US compute capacity remains intact.”at 3:28

Ariana Salvatore · Morgan Stanley

AI regulation will stay incremental and fragmented rather than a sweeping federal regime, regardless of midterm results.

The midterms matter much less for broader AI safety and regulation. The expectation is incremental, fragmented regulation rather than a sweeping federal regime. Targeted action on AI safety, data governance, and frontier model oversight is possible, but congressional composition alone is unlikely to trigger comprehensive legislation absent a high-profile safety or security incident, and executive agencies remain the more important actors on tech restrictions and model access.

“Our expectation remains for incremental and fragmented regulation rather than a sweeping new federal regime.”at 2:57