Midterm Election Results: Three Key Takeaways

Ariana Salvatore · Morgan Stanley

Texas Democratic governor's data center restriction ambitions are hard to implement under a Republican legislature, though executive policy risk remains.

Texas's flip to a Democratic governor raised questions about restrictions on data center development and the broader AI trade. Salvatore argues the incoming governor still faces a Republican-controlled state legislature, which limits the scope for ambitious legislative changes on tax policy or on empowering local communities to negotiate with data center developers. She concedes this does not eliminate policy risk, which can come through executive and regulatory channels, but she believes the more aggressive scenarios investors initially priced may be hard to implement. She frames the AI focus as the gap between state-level political constraints and the broader national imperative to support infrastructure development, with access to power, permitting and geography central to the AI investment thesis.

“In Texas, for example, the incoming Democratic governor would still face a Republican controlled state legislature. That, in essence, limits the scope for some of the more ambitious changes that require legislation pertaining to tax policy or empowering local communities to negotiate.”at 1:31

Ariana Salvatore · Morgan Stanley

Expects an early-next-year pull-forward in M&A activity, as the election does not reverse deal-friendly executive policy.

Salvatore says Morgan Stanley has been expecting a pull-forward in M&A activity early next year and that this remains their view. She notes that the Trump administration is still perceived as favorable toward deal-making and that the agencies reviewing transactions remain central to the process. She adds that the election is likely to bring greater congressional oversight, which can create headlines and uncertainty, but that congressional scrutiny through investigations and hearings is distinct from actual regulatory authority, so it does not change the deal trajectory much. Economic conditions, the rates backdrop and CEO confidence also matter, but politics is not the only factor.

“We've been expecting a pull forward in M and A activity early next year, and that remains our view.”at 2:07

Ariana Salvatore · Morgan Stanley

Financial sector deregulation will continue; the election does not meaningfully reverse it, though oversight rises.

Salvatore argues that the election does not meaningfully reverse the trend of financial sector deregulation. Her reasoning is that the agencies responsible for merger approvals and financial sector deregulation still drive these outcomes, and that congressional oversight through hearings and investigations is distinct from regulatory authority. She expects more oversight and headlines to come for financials, but relatively limited changes to the trajectory of deregulation.

“Ultimately, the agencies still drive merger approvals and financial sector deregulation, and we don't think the election meaningfully reverses that trend.”at 2:43

Ariana Salvatore · Morgan Stanley

Delaying SNAP and Medicaid spending cuts under the OBBBA is a modest upside risk to US growth.

Under Morgan Stanley's cohesive Democratic majority scenario, the most consequential potential legislative change is a delay in implementing the SNAP and Medicaid spending reductions under the One Big Beautiful Bill Act. Salvatore says this could be a modest upside risk to the firm's growth forecast to the extent that maintaining those benefits supports household spending. Her bottom line on fiscal policy is that delaying these spending reductions creates a modest upside risk to growth.

“the most consequential potential legislative change is a delay in the implementation of the SNAP and Medicaid spending reductions under the One Big Beautiful Bill Act. We think that could present a modest upside risk to our growth forecast”at 3:03

Ariana Salvatore · Morgan Stanley

Midterms shift political power more than policy; the next two years bring more noise than legislative change.

Salvatore says the Democrats' stronger-than-expected midterm result is a more substantial political shift than anticipated, but its market and policy implications are more nuanced. Under her cohesive Democratic majority scenario, the most consequential legislative change is a delay to SNAP and Medicaid spending reductions, so she expects the next two years to bring considerably more political noise than substantive legislation. She argues the president is the real driver of markets, since executive authorities on tariffs, geopolitics, deregulation and export controls have been the key factors. She also cautions against extrapolating these results to the 2028 presidential race.

“we think the next two years will be characterized by considerably more political noise than substantive legislative change.”at 3:20