Thoughts on the Market

Our analysts Andrew Percoco and David Arcaro break down how AI’s surging energy demand could reshape the way we produce, store and use power.
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Andrew Percoco: Welcome to Thoughts on the Market. I'm Andrew Percoco, Morgan Stanley's U.S. Autos and Shared Mobility analyst.
David Arcaro: And I'm Dave Arcaro, Morgan Stanley's U.S. Power, Utilities, and Clean Tech analyst.
Andrew Percoco: Today, why the AI power crunch could transform how we generate, store, and consume electricity.
It's Tuesday, November 3rd, at 10am in New York.
Andrew Percoco: So Dave, the whole AI power shortfall and, you know, how data centers [are] creating a power crunch is not necessarily a new topic. I think we've had many conversations, many people listening have probably heard this is, kind of, being a bottleneck for AI deployment.
But I'm curious, how have your views around the role of distributed power changed in terms of its role in solving some of the shortfalls in the market? I think there's a lot of debate in the industry around whether or not these solutions are "bridge." Or whether they're structural and they can be truly long-term sources of supply to the market.
So maybe just help us think about, you know, how our views have really changed, as it relates to distributed power specifically.
David Arcaro: One of the things that we have seen is that the shortfall has grown in our estimates over the last several iterations. We're now looking at upwards of an 80 gigawatt shortfall by 2029.
And how do we solve that? Well, I'd say we've leaned more into on-site power, bringing your own power. What is that? You know, if you are still waiting for years for a grid connection from the utility, what can you do as an alternative? You can bring your own power. You could bring small scale power equipment to get the high reliability in a much faster timeframe than you would waiting for the grid in comparison.
And so we're seeing that increasing extremely rapidly in popularity among hyperscalers and data center developers. And we're seeing them much more, being willing to consider it on a long-term basis.
What used to be, "Hey, I need to cover a few years just to bridge until I have line of sight to getting a connection to my utility…" Now we're seeing actually 15, 18, 20-year contracts for these, you know, what used to be considered just smaller scale, less attractive solutions.
They're now long-term, with what looks like much more permanent considerations for highly reliable data center AI power.
Andrew Percoco: I think there's a preconceived notion in the market that the grid's going to catch up; and that we won't need these solutions longer term. Or that we're building too much of it and there's too much manufacturing capacity coming to the market.
So maybe we can segment those into two separate questions.
Like one, what is actually the bottleneck? I think everyone thinks of it as a power generation bottleneck. But I think you've done some interesting work around how there's also transmission and distribution bottlenecks that don't get solved as quickly as the power generation. So maybe you can talk to that.
But then secondly, when we think about the long-term, you know, case for distributed power. Are there certain types of technologies that maybe screen better or more favorably? Or certain characteristics of certain technologies that screen more favorably when you think about this being a structural source of power rather than maybe a short-term fix?
David Arcaro: Yeah. The bottleneck is very often in the utility space. Utilities are seeing such an unprecedented demand for electricity from the data center industry. They're scrambling to keep up with it. They're not used to growing this fast, and it's often their electric transmission network that is falling behind.
It's the long distance power lines and substation equipment that the utilities are really trying to react [to] – and to grow alongside the data center industry. But we expect them to fall short; and pretty meaningfully short. You know, this is large scale infrastructure that takes years to develop and build.
So, then when it comes to onsite power, as you're growing alongside that constraint or trying to avoid that constraint. We're seeing that data centers, they're very much prioritizing speed. The quicker they can get the power the better.
But you know, more and more we're seeing other factors come into play. How supportive is the community for different applications? You know, what's the air emissions profile, the water use, the noise consideration? What are the overall emissions that you're considering here? And then also what are the operational characteristics of that equipment?
So, we've looked carefully at those. And we come down to these technologies, fuel cells, engines, turbines. The industry's really pursuing all of them in this chase for quick time to power, and to get around that bottleneck.
Andrew Percoco: And to that point, it seems like what matters to maybe the developers is changing. It used to just be cost, then it was cost plus time. And now it's cost plus time plus noise and emissions, [be]cause obviously there's always a lot of political pushback.
Take that maybe one step further and say it's not just the data center market that is looking at these technologies now. It's also commercial and industrial applications where obviously, you know, there's a big trend to onshore manufacturing; a re-industrialization of the U.S. And our teams have collaboratively estimated I think 10 gigawatts a year of incremental demand for power just from industrialization of – or reshoring of the U.S.
But one technology we haven't talked about yet is energy storage. And this is part of the... When I think about the auto industry, this is obviously where they play a somewhat critical role, which I'll talk about in a second.
But Dave, just help us understand: where is energy storage being used? And how big is that market for data centers specifically?
David Arcaro: Yeah. Storage has a number of applications out there, and one of the fastest growing applications is going to be with data centers. You know, they consume power in such a new way that data centers are ramping up and down instantaneously.
Massive quantities of electricity load, going up and down instantaneously, which is not what the grid is capable of handling, and even some of this on-site power equipment isn't ready to accommodate such quick changes in load. And so we're seeing battery storage as the solution in a growing proportion of data centers around the country.
We're expecting even by 2030, it's such a fast-growing end market, a fast-growing TAM, that we would expect the data center demand for battery storage in 2030 to even exceed the grid demand for battery storage in that year in terms of the incremental, new projects that are added in that year.
So it absolutely – a very fast-growing opportunity for lithium-ion battery storage being added to data centers.
Andrew Percoco: Yeah, I mean, that makes a lot of sense, and I think that corroborates what we're hearing and seeing in the auto industry. Where you are seeing a number of companies explore energy storage as a new end market to essentially reutilize their low-utilized capacity or underutilized capacity as it relates to EVs – just given the lower than expected demand there.
Obviously Tesla, a very obvious player in the market that has a very large energy storage business in the U.S. Ford is now building an energy storage business in the U.S. and has started to build a rather large backlog.
So, I think there's some obvious ways in which the auto industry is essentially, you know, taking the opportunity where EV demand has been lower to reutilize that in the energy storage market, which is faster growth. And in potentially some cases, you know, higher margin than they've seen in the EV industry.
So, that – to me – is like the most obvious opportunity for the auto industry in terms of how they can participate in the growth in AI power infrastructure.
The second derivative would be, you know, power generation itself. And we've seen some suppliers, auto suppliers essentially; take their automotive grade technology and repurpose it into turbine generators, into energy storage systems, into microgrid inverters to essentially serve this market with existing technology that they manufacture today for vehicles. Just repurposing it for the data center industry.
So, you know, it's an auto industry that hasn't really seen much growth over the last five years, so it's a very interesting opportunity for these companies to, with very little incremental capital investment, find areas of growth outside of their traditional sub-sectors.
David Arcaro: And as we're looking for new creative sources of power, electric vehicles are an area that some are exploring to become a source of power rather than just consuming it. I guess, how meaningful could vehicle-to-grid technology become for the broader energy system?
Andrew Percoco: I think over time it could be fairly significant. I mean, today if you look at California, there's some existing vehicle-to-grid or home-to-grid systems or programs in place. And they dispatch between 500 to 1,000 megawatts of power to the California grid during peak periods of time.
So, it is fairly significant. It's fairly isolated to California 'cause there's a very high degree of EV penetration and also residential solar with battery storage. So [it] makes it a somewhat of a unique market to be able to provide that.
But over time, as we start thinking about, you know, 20, 30, 40 percent of annual EV sales or annual vehicle sales being EVs across the U.S., that's when that could start to become a much more significant contribution to the overall power supply.
So it's probably more of a 2030 plus conversation, if I'm going to be honest in terms of when it starts to move the needle. But in places like California, you are already starting to see it, you know, contribute fairly significantly during peak periods of time.
Andrew Percoco: All right. Well, I think we can wrap it there. So Dave, thanks for taking the time to talk.
David Arcaro: Great speaking with you, Andrew.
Andrew Percoco: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Stephen Grambling explains how changes in booking habits could redirect billions in travel industry spending.
Read more insights from Morgan Stanley.

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Welcome to Thoughts on the Market. I’m Stephen Grambling, Morgan Stanley’s U.S. Gaming, Lodging, and Leisure analyst.
Today: how AI could transform hotel bookings and reshape the economics of the travel industry.
It's Monday, November 2nd, at 10am in New York.
So, we all love dreaming about and going on vacations, right? But you know what we don’t love as much? Scrolling through dozens of hotel listings, comparing prices across websites, contemplating where and how much we can use our rewards or maximize points or wondering if we’re getting the best deal for the right experience.
So, imagine the relief of having an AI assistant understand you and your families’ preferences, all of your status and loyalty points, aggregated details and reviews of all the hotels you’ve ever travelled to and might want to travel to – and all you need to do is evaluate locations? Then it finds the right hotel and books it for you.
That future is coming into focus, and it could reshape the economics associated with the marketing and distribution behind the $640 billion global hotel industry.
We estimate that every year the lodging industry spends between $22 to $55 billion on marketing. Add roughly $30 billion in fees collected by online travel agencies, or OTAs, and we're talking about $55 to $85 billion in spending that AI could influence.
Today, when you book through a third-party travel website, hotels typically pay commissions of 10 to 20 percent if it’s a branded hotel, or 20 to 30 percent if it’s independent. Booking directly through a hotel's website costs the brand closer to only 5 percent. That difference can have a meaningful impact on profitability for their owners.
As AI agents increasingly help travelers find hotels, compare options, and potentially book on their behalf we could see a major pivot in brand preference and booking channel. In our analysis of hotel searches across eight U.S. destinations, traditional search engines directed travelers to official hotel websites just 13 percent of the time. With AI-powered searches, that jumped to 97 percent.
But perhaps the most interesting finding involves loyalty programs. When we told the AI agent that a traveler belonged to a hotel loyalty program, 100 percent of the resulting links pointed to official hotel websites. When we specified a membership in an online travel agency's loyalty program, the results shifted entirely to that third-party booking platform. That means the AI agent is already factoring in your rewards, memberships and loyalty preferences into travel recommendations.
We saw similar effects in Europe.
For major hotel brands, this creates a significant opportunity. Their large loyalty programs and established customer relationships could help drive more direct bookings at a lower cost. And even small shifts add up. We estimate that moving just 1 percent of bookings from third-party platforms to hotel websites could boost hotel owners' EBITDA by roughly 0.1 percent to 0.5 percent.
Looking ahead, we expect hotel margins to start benefiting from these savings in the second half of 2027, with further gains in 2028.
Independent and boutique hotels could also profit as AI gets better at matching travelers with unique properties that fit their preferences. Meanwhile, online travel agencies aren't going away. Their extensive hotel inventories, loyalty programs, and scale in payments and fulfillment remain important competitive advantages.
For now, AI-driven referrals still account for only a small fraction of travel website traffic. But as AI platforms develop their own advertising and commission models, the economics could change.
So, what does this mean for the travel industry?
AI could help hotels attract guests at a lower cost while making it easier for travelers to find the right stay. Hotel brands have an edge with their loyalty programs; whereas online travel agencies can leverage unique inventory, boosting independent hotels. It's too early to declare an outright winner but expect more from us as this battle evolves.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

It appears that credit investors have gotten most of what they’ve wished for over the last decade. Our Global Head of Fixed Income Research Andrew Sheets considers whether there could be unintended consequences.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, how spooked should we be about the credit markets?
It's Friday, October 30th, at 2pm in London.
I grew up watching The Simpsons, and I've always had a soft spot for their Halloween episodes. One in particular that's burrowed pretty deep in my memory involves a cursed monkey's paw.
It technically granted wishes to whoever held it, but with unintended consequences. For example, Lisa wishes for world peace, the entire planet disarms; and then aliens invade and take over. That sort of thing.
Keep that monkey's paw in mind.
Credit markets are going through their own jittery episode. After a long period of support, central banks are raising rates and shrinking their balance sheets. Thanks in part to this shift, global yields have risen. And since bond prices move inversely to yields, they've driven negative total returns.
Then there's the AI boom, maybe the defining economic story of 2026. Morgan Stanley estimates that close to $900 billion of CapEx will happen this year, roughly double what we saw last year and triple the levels of 2024. And we think this growth continues, with hyperscaler capital expenditures reaching about $1.5 trillion next year – almost the size of the entire U.S. defense budget.
All that spending requires financing, and credit markets have been a key source of it. Heavy supply from this relatively new sector – technology – has pushed up both yields and spreads, especially because these issuers have often been willing to price their debt pretty cheaply, relative to the rating.
These higher yields haven't slowed down the largest tech companies, given their considerable financial resources. But it has caused ripples further down the chain. Lower-rated credits with more leverage and slower growth are being more impacted by these higher borrowing costs. And the presence of these new technologies has increased fears of disruption to existing business models, especially in sectors like telecom. And as a result, the dispersion between credits has increased.
Scary stuff. Or is it?
If you'd spoken to a credit investor over the last 10 to 15 years, you would have heard a litany of wishes. If only central banks stopped intervening in markets, compressing credit risk premiums. If only yields weren't so low. If only the growth backdrop was better.
These investors wish that the technology sector would finally issue bonds, given its extremely low weight in credit markets, which are heavily skewed towards slower-growing sectors like banks, utilities, and telecom. They wished for new bonds that were highly rated, yet also would have high spreads. They wished for a new issue premium, which had compressed sharply.
And maybe, just maybe, in their wildest dreams, they hoped they could get it all. New bonds that were highly rated in a fast-growing sector issued at a large new issue premium. And hopefully a lot of it.
They also from a business sense wanted dispersion. The case for active credit management relies on the idea that there are differences in credit performance that a skilled analyst can capture. If everything just moves together, well, just buy the index.
We got our wish. Yields are high, with investment-grade credit yielding close to 6 percent in the U.S. and over 4 percent in Europe. Spreads have widened, and there's no central bank intervention to distort this. The AI boom is resulting in record levels of highly rated bond supply in a new sector, often at a significant discount for the rating. And all of this, and more, is driving significant dispersion.
Granted, like the monkey's paw, the reality of this wish may feel different from what investors imagined. But unlike it, we don't think this is a Halloween tale.
The fact that current conditions check so many boxes of what investors were looking for and address so many underlying needs is a good, healthy thing in our view. The path is hardly straightforward.
But for now, we're less frightened of this story.
Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.
And of course, Happy Halloween.

Our Head of Digital Asset Strategy Amy Oldenburg joins Global Digital Asset Strategist Felix Stratmann discuss how tokenization, regulation, and the convergence of traditional and digital finance could reshape global markets.
Read more insights from Morgan Stanley.

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Felix Stratmann: Welcome to Thoughts on the Market. I'm Felix Stratmann, Global Digital Asset Strategist with Morgan Stanley Research.
Amy Oldenburg: And I'm Amy Oldenburg, Head of Digital Asset Strategy.
Felix Stratmann: Today, we're looking beyond crypto prices to explore how digital assets could transform the way financial markets operate.
It's Thursday, October 29th at 2pm in London.
Amy Oldenburg: And 10am in New York.
Felix Stratmann: So, we're used to being able to send money, shop, and access information anytime, anywhere online, right? But much of the financial system still operates on infrastructure built decades ago, with limited trading hours and transactions that can take days to settle.
Digital assets could fundamentally change that. Amy, your work focuses on how financial institutions put digital asset technology to use. When people hear digital assets, they still mainly think of Bitcoin. But what bigger shift in financial infrastructure are they missing?
Amy Oldenburg: One thing I would focus on is – while Bitcoin may have showcased the technology for us, there's a much bigger innovation story here that we need to focus on, and this is really what's going to create the future of efficiencies and new products for our clients. We've seen many other industries get disrupted by innovation and technology. And now it's coming for financial services. And we're really dealing with this in many different ways today.
Felix Stratmann: Yeah, and I guess as that infrastructure changes so could the competitive landscape, right? So which parts of the existing financial systems stand to benefit the most, and which could face the greatest disruption from your perspective?
Amy Oldenburg: Yeah, I think it's good to look at some of the different points we've seen in history. Even if we think about some of the parallels to the internet era. While many of those early activities were simpler in terms of what happened, just digitizing company information for the first time.
We're also seeing that simpler product design happening within digital assets. We're tokenizing equities and we're tokenizing treasuries. And that's simply to get them in digital form. It's really the future of programmability, really embedded in some of these products that will be the powerful force that we'll see in the future.
So I think areas where you have high friction and even a heavier administrative burden, that's areas where we may see some of the biggest transformations happen in this space.
So Felix, I'm looking at this sector from the strategy side. Curious from your research perspective, where are you seeing the clearest signs of tokenization moving from concept to real market activity today?
Felix Stratmann: So I mean, look, we are early in the tokenization game. You know tokenized real world assets are about [$] 30 to 40 billion today. But they're growing quickly. That number was essentially nothing just a couple of years ago. And recently we put out a forecast saying we expect them to reach [$] 2.3 trillion by 2030.
What’s driving that? A couple things I would say. Really it comes down to where traditional financial infrastructure has the most friction. One of those areas being collateral management. Getting your collateral where it needs to go, whether that be 24/7 or internationally, this is a big opportunity for tokenized assets.
And we're seeing growing interest in and demand for related products like tokenized money market funds or government securities, which are one of the fastest growing areas of tokenization. And again, these can potentially move more easily between institutions or be used as collateral. And this is especially important, I would say, as markets move towards 24/7, right?
One thing related to that where we're seeing increasing activity is tokenized stocks. You know, I would say they're not necessarily representing a more efficient state of the equity market yet, but they're an important step towards testing and demonstrating, you know, the benefits of tokenized assets in global distribution and also enhanced utility, right?
And then elsewhere, I think, we need to look at digital money as well. So, we've talked about the assets, but the cash side of the equation is equally as important. And that's also starting to operate at a larger scale. Still largely crypto focused, but stable coins are increasingly being used in real payment activity, right?
So, we see that growing, and approaching [$] 100 billion or so a month right now. And yeah, maybe changing gears here just a bit. This progress we've been discussing is happening against a backdrop of a bit of regulatory uncertainty, right? The CLARITY Act hasn't advanced as proponents had hoped. How do institutions balance that uncertainty against the need to keep investing in new infrastructure?
Amy Oldenburg: Felix, I have to say regulatory topics have been just the theme of 2026 this year. It's not only [the] CLARITY Act. You had highlighted digital money, which is also wrapped up in the Genius Act, which will go in force in January of 2027. And then we've seen innovation exemptions also come to market in the last few weeks.
You know, the future requires new tech, and how we're focused on this. We're not picking blockchain winners or even standards at this stage. We're really focused on building out the core infrastructures, because beyond regulation, there are certain non-negotiables that we just have to be ready for a future of 24/7 trading, real-time data, and the world ahead of us, which all of the regulations are really pointing towards a future of.
And Felix, I'll turn it back on you as we talk about regulatory uncertainty. It doesn't necessarily affect every part of the market the same way. Where do you think it could hold back adoption? And where do you see progress that may continue even under the existing frameworks?
Felix Stratmann: Yeah, so look, CLARITY specifically was primarily a crypto market infrastructure build, right. And it could have provided a framework for how crypto trading is regulated. And also what regulations are relevant to decentralized financial applications. But, really that’s only one part of this digital assets theme, right.
Tokenization, for example, you know, that could continue to progress because tokenizing existing security – that does not fundamentally change what that security is, right. Stock remains a stock; security is a security. Unit ownership is recorded in the blockchain.
So, there’s already scope to develop, you know, things like tokenized funds, payment infrastructure, and institutional settlement under existing legal frameworks. I would say that, you know, firms are still looking for clarification from regulators. But that’s rather than wholesale new regulation being necessary.
And look, to that point, we've already seen the SEC and CFTC very engaged in proposing rules and guidance post CLARITY. And then you also have the Genius Act, and the associated rulemaking from the relevant regulators. And that's paving a path for stablecoin usage and adoption.
So look, yes, progress can definitely continue, particularly for the financial use cases of digital asset technology, even without comprehensive legislation.
But you know, maybe let's think about what that means in practice, right? Even with the regulatory uncertainty, firms are still making decisions about when to modernize.
So Amy, from your perspective, what can previous shifts in financial technology, like electronic trading, maybe, teach us about the risks of waiting too long to invest?
Amy Oldenburg: Felix, I love your example of electronic trading, and there's so many periods in history where we lived through some of these transformations and impacts to financial services. Where we can take some of the lessons learned and really make sure we keep those in mind.
But I think there's another one that we really need to also keep in mind, and that's really on the execution and managing the internal culture and workforce shifts that we'll also see with some of this innovation that takes place.
These are critical because, you know, with many of these eras of transformation, you don't just flip a light switch to turn much of this on. We're living through many years of transformation, and I see digital assets being a multi-year transformation, just as we saw some of those other periods in history take many years to actually deploy over time.
Felix Stratmann: Yeah that modernization, kind of, brings us to another important theme. The convergence of traditional finance and digital assets. What does that actually mean in practice? Are we heading towards two financial systems operating side by side? Or one increasingly integrated system?
Amy Oldenburg: Oh, yeah. That's a really tough question, and I think one of the things we always love to try to determine a black-and-white outcome. But I think that one of the things that's pretty clear to us today is that for a number of years, we'll be living in and supporting a hybrid world as we work through the transformation that I even just talked about earlier.
There's definitely operational efficiencies and, and strong product design that we really need to stay focused on. And that will be hard for our clients and even our firms to ignore going forward. So I think just like, AI is gonna impact our future, we have to think about how this integration comes together.
And I think we may see not only integration or a unified system going forward. But we may even see financial services products distributed in different ways.
And Felix, I'm going to turn it back over to you. What is your research show in terms of the clearest evidence for traditional and digital finance coming together? Do you see established financial institutions adopting blockchain faster than maybe many people realize?
Felix Stratmann: Yeah absolutely, I mean we are early in the adoption of this technology. But the momentum is very much real, right. I looked through press releases from global financial companies and I found that roughly quarter by count, and some 60 percent by market cap, you know, had announced, piloted or launched digital assets initiatives.
So, institutions are seriously behind this. And then you also see opportunity in 24x7 follow-the-sun type of Treasury management, you know, that digital money enables. And that could be highly relevant, you know, for corporate treasuries.
So, yeah, I think absolutely firms are adopting this technology. And I think convergence is increasingly what we're seeing because these products are being issued on public blockchains. And firms are experimenting how to incorporate them into decentralized financial protocols. And yeah, I mean, it's very much a case of financial institutions using the technology while crypto native platforms are trying to figure out how to better cater towards regulatory compliance and privacy needs, right?
And while it's early, look, it’s not like the early days of crypto, entirely, right, which was very much trying to replace the financial system. Now I think we're increasingly seeing this convergence with the existing system to make it more efficient.
But maybe let's look ahead now. What needs to happen before digital assets become an everyday part of how financial markets operate?
Amy Oldenburg: To your point that you brought up earlier on building out blockchains, the entire industry right now is really trying to invest and build this infrastructure. But it's not only the infrastructure, it's redesigning workflows, it's upgrading policies, looking at the governance impacts of this future.
And that is a lot of work for many of our firms to take on, especially with so many competing innovation topics in the news right now. It may slow some of that adoption in the near term, I think what we'll see is suddenly – as much of this work is done and it starts to come to market, slowly, we will transition from not talking about the future of finance. But really that this will just become finance. And that's a path that we feel we're clearly on at this stage.
Felix Stratmann: Well, look Amy, I know we could sit here talking about this for hours. But I think that'll wrap us up for today. Amy, thanks very much for joining me.
Amy Oldenburg: Thanks, Felix.
Felix Stratmann: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Amy Oldenburg is a member of Morgan Stanley Firm Management. She is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.
Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.
Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.
Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to other forms of digital assets. Markets and exchanges for digital assets are not currently regulated in the same manner and do not provide the customer protections available in equities, fixed income, options, futures, commodities or foreign exchange markets.
Morgan Stanley and its affiliates do business that may relate to some of the digital assets or other related products discussed in Morgan Stanley Research. These could include market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking.

With Election Day a week away, our Head of U.S. Public Policy Research Ariana Salvatore and Wealth Management's Monica Guerra explain why the aftermath of the midterms may matter more to markets than who wins.
Read more insights from Morgan Stanley.

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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.
Monica Guerra: And I'm Monica Guerra, Head of Policy and Geopolitical Strategy for Morgan Stanley Wealth Management.
Ariana Salvatore: Today we're going to be talking about the upcoming midterm elections and what investors should be watching from both an institutional and individual investor perspective.
It's Wednesday, October 28th, at 10am in New York.
Well, Election Day is just about a week away. Investors are obviously increasingly focused on what a potential change in congressional control could mean for markets. And Monica, you and I are kind of grappling with this question through slightly different lenses. And that's why I thought it'd make sense to bring you in today.
We both agree that what happens after the election is probably more important than the outcome itself. But let's start with the election backdrop. Your team has developed a Midterm Signal Monitor. What are the indicators telling us?
Monica Guerra: Well, Ariana, affordability has really emerged as the defining issue for voters this cycle. Our monitor tracks four indicators positively correlated with midterm election outcomes: the generic congressional ballot, presidential approval, consumer sentiment, and gasoline prices.
Democrats lead the generic ballot by about eight points, and presidential approval is 38.8 percent, just below the 40 percent historical reference point when the opposition political party tends to gain momentum.
Now, consumer sentiment in October is the lowest of any October before a midterm election in the University of Michigan survey's entire history. And gasoline prices in September were up 37.6 percent from a year ago.
So taken together, these signals point to a challenging environment for the incumbent party, really driven by affordability. Persistent inflation, elevated borrowing costs, and renewed energy price pressures tied to the conflict with Iran are all weighing on household purchasing power. But importantly, these are directional indicators, not necessarily a forecast of the election outcome itself.
Now, Ariana, when you're looking at the potential outcomes from your perspective, how much do you actually expect to change?
Ariana Salvatore: Well, I think that's the key question, right? Because our view has been that the midterms are unlikely to fundamentally change the direction of U.S. policy. And that's because a lot of the uncertainty that markets have dealt with since the beginning of 2025 has come from the executive branch rather than Congress.
So, regardless of the outcome, we think things like tariffs, deregulation, immigration, geopolitics, export controls – all of those variables will remain important sources of policy uncertainty. Where congressional control matters more is on fiscal policy.
So, a divided government would make new legislation harder to pass, and that could mean more contentious negotiations over things like government funding, the debt limit, and defense spending.
So, for institutional investors, it's a little bit less about which party wins and more about what the composition of Congress means for the policy agenda going forward. As well as leadership's ability to really organize and corral different members of the caucus to effectively use their leverage around some of these negotiations.
So, Monica, I imagine the questions that you're getting from individual investors may be a little bit different. Talk us through some of those.
Monica Guerra: Yeah, they are. I think the biggest question is what the election can mean for an individual's portfolio. And history does offer us some interesting perspective here.
So, the S&P 500 has averaged about a 14 percent return in the calendar year following a midterm election, compared with roughly just 3 percent in the midterm year itself. And this year, as we all know, the index has already outperformed that typical second-year trajectory, which could heighten risks and opportunities for sectors sensitive to policy decisions.
For example, recent strength in technology and energy combined with the narrow market breadth could amplify policy-related volatility, particularly in industries facing heightened scrutiny under the new Congress.
Of course, that's not a forecast, and we caution against making portfolio decisions based on historical election patterns or political headlines alone; as the business cycle, corporate earnings, inflation, interest rates, and the AI investment cycle are likely to matter much, much more over the long run.
But one area where I do think our perspectives really intersect is the growing focus on electricity costs and data centers.
Ariana Salvatore: That's right, and it's actually one of the policy themes that we've been highlighting the most into the election. Our view is that the AI infrastructure build-out is unlikely to face broad federal prohibition, and that's regardless of who controls Congress.
There's a bipartisan recognition right now in D.C. – of AI as a strategic priority, particularly given competition with China. But at the same time, we are seeing growing political resistance at the state and local levels, where concerns around electricity prices, water usage, and infrastructure costs are becoming increasingly important.
So, where that all nets out, what we've been describing is a base case of a conditional build-out. The investment cycle continues, but both the pace and the geographic distribution of new projects could become more dependent on local policy decisions. And that distinction matters for investors exposed to utilities, power generation, and the broader AI infrastructure supply chain.
So, Monica, how are you thinking about that issue specifically for wealth management clients?
Monica Guerra: I think it's a really good example of how a national political issue can have very local investment implications. For individuals, the concern often begins at home with the electricity bill. But it can also have implications for local issuers and the municipal bond market – dependent on whether a community and local government captures the benefits of new investment or absorbs the infrastructure costs.
And that's why we've been emphasizing the importance of following what state and local governments are actually doing rather than just reacting to every move out of Washington. The same applies for taxes, which is another area where we're getting a lot of questions.
Ariana Salvatore: Yeah, let's talk about that because taxes are probably the clearest example of how the near-term and longer-term implications can differ. [Of] course, at the federal level, we don't expect a change in congressional composition to meaningfully reverse the tax policies enacted last year through the OBBA.
The president will remain in the Oval Office for the next two years. That means that he retains veto authority, which from a mechanical perspective just creates a significant hurdle to major legislative changes. But at the same time, the midterms could start to lay the groundwork for a different tax debate heading into 2028 and [20]29, specifically around AI and the build-out.
For markets, expectations can start changing well before legislation actually arrives.
Monica Guerra: Exactly. And for individual investors, there's also a very important state level dimension. We're watching proposals involving wealth taxes, property taxes, and state income taxes, all of which could have implications for household financial planning and the muni[cipal] bond market.
So even if federal tax policy remains relatively stable – which we think it will – investors still need to be attentive to potential changes that are closer to home.
And I want to come back to that broader market implications for a moment and really dig into that with you, Ariana. Are there particular areas where you think investors could be underestimating the impact of the election?
Ariana Salvatore: I think the biggest risk is actually assuming that [a] divided government automatically means less policy volatility. Typically, the blueprint here is divided government means gridlock. That constraint is actually clarity for markets, which can be a good thing. But in this case, of course, even if a change in congressional control occurs, you might see additional oversight investigations and political scrutiny – but executive action can continue.
And that could matter at the margin for sectors like technology and energy, which we've highlighted in terms of both the antitrust angle and deregulation more broadly. But I'd also distinguish between headline risk and actual changes to earnings or the macro-outlook.
Not every political development is going to translate to a meaningful market impact, which is why we see this election as more of a micro than a macro catalyst.
Monica Guerra: I agree, and from the wealth management perspective, that's why we really emphasize discipline. And lean into the idea that negative policy headlines often doesn't equal negative fundamentals.
Election outcomes can change the policy backdrop and create sector-specific opportunities or risks. That individual investors should be careful about allowing short-term political developments to drive long-term asset allocation decisions.
Ariana Salvatore: So maybe to wrap up, Monica, what's one thing that you'd encourage individual investors to watch after November 3rd?
Monica Guerra: Yeah. I'd focus on the policy decisions that actually affect households and portfolios, especially energy costs and state and local developments. And I'd encourage investors to work with their advisors distinguishing meaningful policy change from that political noise.
How about you?
Ariana Salvatore: Well, from my perspective, I think there's a lot to watch in this lame duck period. Of course, the fiscal calendar, so government funding, potentially addressing the debt limit. We've got the NDAA, that's the bill that funds the Pentagon, coming due in December. You've got potential U.S.-China meetings.
So, plenty to watch, I'd say, between now and the end of the year.
But maybe just to kind of put a through line through all this, our broader takeaway is that the midterms probably won't alter fundamentally the direction of U.S. policy. But they could change where risks emerge and how quickly certain priorities can move forward.
So, for investors, the important question isn't just who wins in November, it's actually what changes as a result.
Monica, thanks for joining me.
Monica Guerra: Thanks, Ariana. Great speaking with you.
Ariana Salvatore: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Monica Guerra is a member of Morgan Stanley’s Wealth Management Division. She is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.