Morgan Stanley: Democratic control of Congress and data center restrictions could heighten volatility in US assets

How do the election results change policy and market expectations?

Democrats won control of the House and Senate, with votes still being counted in some districts. Morgan Stanley believes the outcome is close to its scenario of a Democratic majority capable of reaching consensus within the party.
The bank believes uncertainty from the change in control could weigh on equity indexes. Investors had broadly expected a Democratic sweep of Congress, but with only a narrow Senate majority; the Democrats' simultaneous victory in the Texas gubernatorial election could increase near-term volatility.
Policies on tariffs, trade, export controls and deregulation are primarily driven by the executive branch. Morgan Stanley expects these policies to continue, along with policy uncertainty.

Grid connections, rates for large electricity loads, site selection and tax incentives for data centers are primarily determined by state and local authorities. Morgan Stanley expects new restrictions to cause projects to diverge across regions, but the overall AI capital spending cycle to continue.
Texas governor-elect Gina Hinojosa advocates suspending new data center permits until relevant legislation is enacted; the proposal applies to new permits and excludes projects already under construction. The governor can influence approvals through executive orders and regulatory appointments, but lasting changes such as ending tax incentives require state legislative approval.
The restrictions are being discussed against an existing grid backdrop: applications for grid connections to the Electric Reliability Council of Texas total approximately 474 gigawatts, more than 5 times its historical peak electricity demand, and data centers account for approximately 90% of applications for new electricity demand. A local review was already underway to distinguish credible projects from speculative applications that may exaggerate demand.
Morgan Stanley expects the probability of success for potential new projects in Texas may need to be revised down. At the same time, constrained new supply could increase the scarcity value and pricing power of existing facilities with power already secured.

Morgan Stanley expects Democrats may seek to delay or soften cuts to the Supplemental Nutrition Assistance Program (SNAP) and Medicaid in negotiations over fiscal deadlines. The bank estimates this could lift personal consumption growth in 2027 by up to 0.4 percentage points; the overall fiscal deficit would still be approximately 6% of GDP.
After the new Congress takes office in January 2027, Republicans will no longer be able to pass budget reconciliation bills on their own, eliminating the main upside risk to Treasury borrowing needs; however, delaying benefit cuts could modestly increase issuance of 2- to 7-year Treasuries. The bank notes that the market had priced in almost no additional supply from unified Republican control of Congress before the election.
Current government funding runs through 11 December 2026. If the debt ceiling is not raised during the lame-duck session, Democrats may attach policy demands to subsequent negotiations. The bank's rates team estimates that the debt ceiling will become a constraint in March 2027, and that the Treasury's deadline for exhausting extraordinary measures and cash will fall at the end of the third quarter of 2027.

The bank remains overweight global equities and underweight core fixed income because, in aggregate, changes in US technology investment may be limited, and AI capital spending can still support corporate earnings, including in Europe and emerging markets.
In the near term, expectations of data center restrictions could hurt AI sentiment; financing needs for digital infrastructure could keep corporate bond issuance high, putting upward pressure on credit spreads, especially for lower-quality credit.
In foreign exchange, the bank expects near-term safe-haven trades to favor the yen, Swiss franc and euro against the US dollar. The Australian dollar could be weighed down by weaker sentiment toward AI-related equities, while the Canadian dollar could underperform low-yielding currencies because of targeted tariff risks.