Thoughts on the Market

Concerns over electricity bills and water use are turning into political action. Our Head of Public Policy Research Ariana Salvatore breaks down what the midterms mean for the data center pipeline, hyperscaler CapEx and investors.
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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley.
Today, the U.S. midterm elections and what they could mean for the build-out of AI infrastructure.
It's Wednesday, November 11th at 10am in New York.
Growing concerns around electricity bills, water consumption, and the economic benefits of data centers have translated into meaningful political opposition. And last week's results reinforce just how salient those issues were in voters' decision-making.
But what are the practical implications for the build-out?
We think that the midterms were actually more likely to change where data centers get built, when they come online, and what cost is associated with doing so, rather than whether they get built at all.
We've been flagging political opposition to data centers as a risk for some time, and the election results reinforce our view that this is largely a state-by-state and even project-by-project issue.
Let's take a few examples.
Texas, we think, was the most consequential result. Governor-elect Hinojosa has proposed pausing new data center approvals until stronger protections are in place. In Ohio, Governor-elect Acton has proposed a conditional moratorium. And in Georgia, we see policy action as more incremental, with greater scrutiny of construction approvals and how electricity infrastructure costs are allocated.
So altogether, these developments point to a broader shift in political and community support. The opposition is increasingly bipartisan, but the friction remains primarily local.
At the federal level, we think the government retains an accommodative posture, just given the importance of AI as national security infrastructure and the likelihood of a presidential veto on restrictive legislation.
But what does this mean for the build-out?
My colleague Cameron McVey and his team estimate that approximately five gigawatts of U.S. data center projects, or roughly 20 percent of the 2028 pipeline, will shift into 2029.
We think 2027 construction will likely remain unaffected because projects are generally already permitted or underway. As a result, U.S. data center capacity additions are projected to be roughly flat in 2028 before growing nearly 40 percent in 2029.
That feeds into our tech analyst view led by Brian Nowak that hyperscaler CapEx next year should remain unchanged at approximately $1.6 trillion and [$]1.8 trillion in 2028. So, our base case is a delay, not a fundamental reduction in investment. In fact, we think this could actually extend the duration of the AI investment cycle, and it reinforces an existing constraint – access to electricity.
We've been highlighting the three Ps that are bottlenecks here: people, power, and politics. Stephen Byrd and our Powering AI team now estimate a 44-gigawatt shortfall in U.S. data center power through 2028, representing roughly 38 percent of projected demand. That means that the critical bottleneck is increasingly shifting from computing equipment to power data center facilities.
And that has several investment implications.
First, the largest and best-capitalized hyperscalers are particularly well-positioned. These are the companies that have a line of sight to 25 to 50 percent return on investment. They also have flexibility to redirect their investment, they can absorb higher costs, and they can improve computing efficiency.
Second, we see opportunities in existing power-secured facilities and technologies that help developers access electricity more quickly. But there are also risks to the supply chain. A slower build-out in 2028 could mean weaker equipment orders, inventory accumulation, and pressure on supplier margins, even if the underlying AI demand remains strong
Lastly, as my colleagues in credit like Vishwas Patkar have been highlighting, the financing environment is likely to become more differentiated under the surface. We continue to expect substantial AI-related borrowing in 2027 led by the hyperscalers. But new construction financing will face greater scrutiny around permitting, power availability, and execution. By contrast, existing data centers with stable cash flows could benefit from increased scarcity and stronger lease pricing.
And finally, our equity strategy colleagues see investment opportunities broadening beyond infrastructure to companies actually adopting AI.
So, the through line here is that midterms have introduced real political and execution risk. But we think that these constraints are more likely to reshape and actually prolong the AI investment cycle than derail it. And with the recent market weakness reflecting a more pessimistic outcome, we see selective opportunities across the AI value chain.
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.

What do the midterm elections mean for the U.S. economic outlook? Arunima Sinha, from our U.S. and Global Economics teams, examines the potential implications for policy, legislation and the broader economic landscape.
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Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's U.S. and Global Economics teams.
Today, I'll talk about our read-throughs from the midterm elections for the macroeconomic backdrop.
It's Tuesday, November 11th at 10am in New York.
Elections have consequences, but the economic implications are not always immediate or broad. There's no denying that last week's U.S. midterm elections brought sweeping change to the Congress and a number of states. And the correlation isn't causation caveat aside; the market has moved a lot in the wake of the results.
But we still think that the near-term macro impulse is narrower. While Democrats swept the legislative branch at the federal level, the White House is of course unchanged. Because the president has authority over tariffs, immigration, and much of the regulatory agenda; legislative change, if it comes, might be a marginal adjustment to some domestic spending, but not the key policy theme for macro.
For AI, and particularly in Texas and Ohio – where the executive branch turned over to the Democrats, but the legislatures did not – state and local governments matter. Whereas the election was necessarily partisan, some Republicans ran on anti-data center platforms. AI policy in the United States is still evolving. There is a risk that some projects could slip from 2028 to 2029, but we remain constructive on the overall build-out.
The trade readthrough is similar. U.S. AI imports have supported export growth across Asia, which makes Asian trade data an important lead indicator for the investment cycle. The election may slow U.S. capacity additions in some places, but it does not point to a broad reversal of the build-out.
The more likely outcome is a more conditional cycle. Projects proceed where power, permitting and local politics are supportive; and capacity migrates away from places where approval gets harder. That changes the geography of investment more than the direction of demand. Indeed, the shift from microchips to broader Korean exports is likely an early signal that trade flows next year become less concentrated and broader based.
Taiwan and Korea remain central to chips and memory, but Mexico is important for server assembly. Southeast Asia is gaining exposure in networking and optical equipment, and Japan and Europe are increasingly involved in semiconductor equipment, turbines, transformers, and other power infrastructure. At the same time, a larger power shortfall in the U.S. could allow demand to spill over to Asia and EMEA, accelerating a dynamic our equity analysts have already been highlighting.
Fiscal policy is the more direct federal channel. But this is not primarily a deficit story. A Democratic majority could delay or soften the scheduled SNAP and Medicaid cuts, but the growth effect would be small. Even a full rollback of the measures due to take effect in January 2027 would add less than half a percentage point to real spending growth.
Nor do we expect a material change in the deficit. Even with these SNAP and Medicaid cuts fully reversed, we think deficits stay around 6 percent of the GDP. And despite the concern about deficit risks, U.S. debt looks more sustainable on a five-year horizon than it did a year ago, due to upside surprises and nominal growth.
The bottom line is one of scope. The political change may well be meaningful and have implications for AI permitting, fiscal negotiations, and therefore differentiated implications across asset classes. But the near-term aggregate economic channels are narrower than the political headline.
Tariffs, immigration, and much of the deregulatory agenda remain largely under executive authority. So, the election mainly shifts the probability distribution around a limited set of legislative and local policy outcomes.
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.

Our CIO and Chief U.S. Equity Strategist Mike Wilson examines signs that the current market correction could be nearing an end.
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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast I’ll be discussing where we are in the bottoming process for this equity market correction.
It's Monday, November 9th at 11:30am in New York.
So, let’s get after it.
There are times when the market spends months worrying about an event, only to discover that by the time it arrives, most of the damage has already been done. I think that is where we are at now. The midterms were the rumor, and the market spent several months selling it.
Semiconductors, data-center beneficiaries, and many early-cycle winners were hit hard before election day, while the S&P 500 finally began catching down to the weak breadth underneath.
That was the missing piece of the correction we identified way back in June: the transition from early to mid-cycle, the peak in the rate of change of earnings revisions, and a Fed that became less accommodative just as investors were most crowded into the momentum of early cycle beneficiaries.
The good news is that this correction looks much closer to the end than the beginning. The S&P 500 has moved toward our 7100-to-7300 support range we identified back in August; while Semiconductors are down roughly 40 percent from their June highs and are approaching the downside targets suggested by our silver-stock analog.
I would not be surprised to see one more test of last week’s lows. Perhaps even a break on lower momentum. That would be the cleanest technical outcome. However, I would not wait for a perfect low since markets rarely send engraved invitations. My preference is to use weakness over the next few weeks to begin adding risk, particularly in quality cyclicals that have de-rated substantially but continue to show strong earnings revisions.
That is an important evolution in the quality call we made back in June. Quality has worked, and I still want to own it. But the rotation is now well understood. The better opportunity may be in quality cyclicals which are less defensive and where expectations have fallen faster than the fundamentals. Industrials stand out in this regard.
Relative earnings revisions have remained durable, ISM backlog data are broadening, and freight volumes have turned positive for the first time in nearly four years. Those are not the signals of a cycle rolling over. They suggest parts of the economy are still moving forward even as the market discounts something worse.
The provocative point is that investors may be preparing for an economic slowdown just as the market is finishing its own recession beneath the surface.
The election also removed one layer of uncertainty around the AI buildout. Our capex mapping suggests data-center spending in 2027 represents about 5 percent of consensus S&P 500 revenue, with a slightly higher but still mid-single-digit contribution in 2028.
Even if some capacity is delayed, the impact on aggregate earnings should be manageable. And much of the risk has already been reflected in valuations, with the S&P 500 trading at just 18x forward earnings.
At the same time, the adoption story keeps improving. More companies are quantifying real benefits from AI, and the discussion is moving beyond productivity toward measurable cost savings and revenue generation. That is why AI adoption remains one of my highest-conviction themes into 2027, even as I stay selective around capital spending beneficiaries in areas like semiconductors.
There are other potential positives coming out of the election. Oil has fallen sharply on hopes for progress with Iran, or at least not a re-escalation. Some SNAP and Medicaid cuts could also be reversed, helping the consumer, while businesses may pull forward investment and M&A ahead of the 2028 presidential election.
Remember, markets tend to trade poorly into midterms and much better afterward. That does not mean the next few weeks will be smooth. Positioning and sentiment are closer to capitulation levels, but not quite there, and a more hawkish Fed could stretch the bottoming process into December. Equity volatility finally caught up with bond volatility last week, a constructive sign that the correction is ending. This is not the moment to get bearish.
Bottom line: buy the rumor and sell the news – but in reverse. The market sold the fear ahead of the events that are now happening. Midterms, AI capex funding supply and a Fed that is tightening. The headlines are the clearing mechanism. We may still need one final retest, but the market has already done most of the work. I want to use that weakness to add quality cyclicals and AI adopters rather than waiting for certainty. By the time the headlines feel safe, the best part of the opportunity will probably be gone.
Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

For investors, the U.S. election was only one part of a much bigger equation. Our Global Head of Fixed Income Andrew Sheets discusses the balance of risks after the midterm results.
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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, what a blue wave means for fixed income.
It's Friday, November 6th at 2pm in London.
If the last decade has taught us anything, it's that financial professionals should approach political predictions and their market impact with a great deal of caution.
With that caveat in mind, let's talk about Tuesday's U.S. midterms and what they might mean for fixed income.
The word surprise has lost some meaning in investing over the years, but the U.S. election results qualify. Democrats won far more seats in both the House and the Senate than almost anyone expected. Key statewide races, such as Texas governor, also flipped unexpectedly. Democrats enjoyed the largest vote share of any party in almost 50 years.
Speaking to investors over the last month, this so-called blue wave, I think, was generally seen as the more market negative outcome. And indeed, in the first hours after U.S. polls closed, that was the market reaction.
But with the results behind us and in the cold light of day, I think there are a number of reasons why fixed income markets over time have grown more comfortable with the result.
First, markets hate uncertainty, and a variety of measures suggest that investors had reduced exposure into Tuesday, whether as a direct function of the vote or due to broader volatility from everything from technology to Brazil. Uncertainty is now lower. After all, we know the result, and investors should have some room to add if they want to.
Second, one factor that has been weighing on fixed income markets this year has been inflation. It's been too high, with both tariffs and energy prices contributing to upward pressure. To the extent that the market sees these results reflecting the unpopularity of tariffs or certain foreign policy, investors could assume that these policies are more likely to change down the road. And that could help to push down long-term bond yields. And much more immediately, unrelated to the election, I note that our economists expect that the next U.S. inflation number this month is going to show a notable step down.
Another factor that's weighed on fixed income this year has been AI spending, which has generated record amounts of bond issuance, pushing up both spreads and yields. Our analysts don't think that the midterms change the big picture on AI. But to the extent that some changes in statewide power result in more regulation and a more elongated build-out – well, that could help ease some of the concerns around supply pressure and potential mismatches between supply and demand.
But maybe the reason not to fret too much about the midterms is even more simple. Following the last 11 midterm elections from 1982 to 2022, the S&P 500 was higher one year later after all of them, regardless of the party that won.
Now, it's possible that going 11 for 11 is just a coincidence; and this is hardly a sophisticated analysis. But I think it speaks to the fact that while elections matter a great deal to the country in question, they don't always mean as much to markets.
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

The AI investment boom is reshaping capital markets, creating opportunities and raising questions about leverage and risk. Vishy Tirupattur and Dan Toscano discuss what this means for the credit cycle and the broader financial system.
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Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.
Today, a special conversation with one of the most seasoned professionals in credit at Morgan Stanley, Dan Toscano, on AI, credit, and the interplay between them.
It's Thursday, November 5th at 11am in New York.
Dan, last time we chatted here, you were very constructive on the potential for AI to be transformative in the economy and markets, and even more constructive on the role that credit markets will play in enabling that transformation.
So, any way we cut it, we are talking about trillions of dollars of CapEx involved in the context of AI buildout. How are you thinking about the AI thesis, AI CapEx thesis and the role that the credit markets are playing?
Dan Toscano: And every time I talk to you, the numbers go up. These numbers continue to expand. The opportunity set continues to expand for our clients. And I would say that nothing surprised me of what we've seen over the course of 2026.
This is not simple, and this is not easy. And there are, as our CEO likes to say, known unknowns. And they factor heavily in the sentiment of investors. And when you're deploying trillions of dollars of capital in a way that has never been deployed in our lifetimes, there are bound to be air pockets.
And so yeah, it's gone as I thought it might. And it just keeps getting bigger and bigger. And it's interesting to me that a lot of the discussion out in the marketplace these days has moved a little bit away from ‘what is this and how does it work’ to ‘what's the value proposition?’ And I think ultimately, that's the biggest question.
And credit investors are asking that question in the form of trying to understand what can go wrong. It's the essence of a credit investor. And equity investors, although that's not my area of expertise, are asking, "What's the upside? And how should I value it today when a lot of these companies are going public for the first time?"
Vishy Tirupattur: The markets are really questioning the return on the invested capital. How soon the returns will get realized? And monetization is the key word here.
But at the back of this, we see that the level of rates have increased pretty meaningfully. Spreads have widened. So, overall borrowing costs for issuers here are clearly higher.
So, on the back of this, do you see this as really a structural supply concern? The markets having to absorb a lot of supply. Or do you see this as being something larger than that? Is it a sign of a larger challenge within the credit markets?
Dan Toscano: Yeah. I mean, there's a lot to unpack there. But look, I would say this. On the topic of, you know, what is the return? What is the value proposition? I've heard, really, two schools of thought from the marketplace. One is we think the return value proposition is high. And you've done some work on the early stages of this to value it.
So, I hear people saying there's almost unlimited upside here, and I hear people saying, "I don't know what the value proposition quite is." I haven't really heard anyone say I think this is a stinker. And I think that's, you know, somewhat emblematic of the world we live in.
But in terms of the cost of capital, I don't think we're seeing any of that in… Obviously underlying rates behave independently, and they're a function of a lot of factors, many of which are positive. And I keep reminding people that the backdrop that we conveniently pass by when we talk about this is an economy that is strong. Issuer earnings have been into the double digits quarter after quarter.
And that's not something I would take for granted. And that can change. And it's done that despite energy instability, all the other things that are impacting the consumer. And yet, you know, we're producing earnings growth and cash flow that are significant.
But back to your question about spreads, in particular. I mean, look at where spreads are today. They are, in my opinion, tight. I think we were at the all-time tights over the course of this year. And so, it's hard for me to sit here and say all this AI-related financing is driving up the cost of capital.
We don't see it in spreads. And, you know, I think the debate around the impact of the trillions of dollars that need to be raised in all markets has yet to play out in the marketplace. People are talking about it, right? It's understanding that volume is coming in scale really hasn't happened, when you think about it. But the market I spend the most time in, non-investment grade credit markets, it's been quiet now for months.
Vishy Tirupattur: In all my years of talking to you and learning from you, the one thing that's always stood out for me is: details matter. And especially when we talk about leveraged credit. So, in the context of AI financing in the leveraged credit market or the broader credit market, what type of details matter?
Dan Toscano: Look, I think that it's evolving. We've talked, I think the last time we were here, we talked about the documents. You know, the documents matter. Investors are always complaining that the terms are too loose. But in the case of what is essentially project finance, I would say details matter in all caps. And put as many exclamation points after that as Elaine Benes would allow, if you remember the Seinfeld reference.
Vishy Tirupattur: Indeed, I do.
Dan Toscano: And so, you know, understanding the details of the lease. And to me, the fundamental question that underpins details matter is: what can go wrong? And if something goes wrong, what happens? And who's taking what risk?
And you'll find that in the documents if you read them closely – in project financing – toll roads and power plants going back decades.
You know, project finance and structured credit is not a new phenomenon. How and when does cash get disbursed? And who controls those decisions?
So, you can protect yourself [so] that if something's going wrong, you don't have cash hemorrhaging out of the system uncontrollably. Things like that, they really matter.
Vishy Tirupattur: You know, one other thing that I keep thinking about is whether the constraint is people or power availability, cost of capital or, you know, potential policy constraints. You know, some sort of a slowdown in AI CapEx is viewed rather cautiously by the equity markets.
How do you think credit markets will handle, you know, a slowdown for any number of reasons in the pace of CapEx spend?
Dan Toscano: Yeah. Well, I mean, I think the pace of CapEx spend gets measured against [a] company's ambitions. Not anything else. It's – We see an opportunity, we would like to take advantage of that opportunity. And in order to do so, we need to build capacity, right?
So, what happens? Client says, "I want this thing built yesterday, not in a week." Okay. So, if it slows down relative to someone's ambitions, it doesn't really create a problem in my mind. All it means is gratification delayed.
So, I think this can speed up, I think it can slow down, as fast as people are comfortable. And when I say people, I mean investors putting capital behind management teams. But I also think management teams feeling comfortable that they can control what they're doing and when they're building capacity… If they're buying chips or selling chips or trafficking in compute, they can speed up or slow down based on the environment around them without consequence.
I think people get worried. And here's one element of timing that does matter, is, you know, once you put a shovel in the ground. And by shovel, I mean dollars, right? Time is money. And there's a lot of work being done around managing the cash flows, leading up to the construction of a data center, throughout the construction itself, which can take 12 to 24 months. And that assumes an environment that is friendly and conducive toward building data centers.
And that's where it really matters.
Vishy Tirupattur: So last question for you, Dan. I know you're a big UConn basketball fan. Other than the UConn basketball team prospects, what keeps you up at night in the context of AI financing?
Dan Toscano: Yeah. Look, I mean, AI keeps a lot of people up at night. It doesn't keep me up at night. What keeps me up at night is UI.
Vishy Tirupattur: U of I, University of Illinois, Fighting Illini, ranked number three ahead of UConn, may I remind you.
Dan Toscano: December 4th, United Center, Chicago, Illinois, I will see you there.
Vishy Tirupattur: I'll see you in Chicago, Dan. Thanks for taking the time to talk to us.
Dan Toscano: My pleasure, Vish. Great to see you.
Vishy Tirupattur: And thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Dan Toscano is a member of Morgan Stanley’s Investment Banking Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, his views are his own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.