3 Policy Catalysts to Watch This Fall

**Michael Zezas** (0:00)
Welcome to Thoughts on the Market. I'm Michael Zezas, Deputy Global Head of Research for Morgan Stanley.

**Ariana Salvatore** (0:05)
And I'm Ariana Salvatore, Head of Public Policy Research.

**Michael Zezas** (0:08)
Today, we'll look ahead to public policy catalysts that matter for investors this fall. It's Wednesday, September 2nd at 10:30 a.m. in New York.
Okay, Ariana, there's a few days left in the summer, and investors are already starting to think about what's going to happen this fall, and there's a pretty heavy calendar, everything from midterm elections to some pretty important diplomatic dates. High level, what do you think people need to focus on?

**Ariana Salvatore** (0:39)
So I'll start with probably the most consequential catalyst of the list that you mentioned, and that's the midterm elections. Obviously not until November 3rd, but the debate is going to start to emerge over the coming weeks in terms of if Democrats were to win just one chamber versus both chambers, if Republicans were to keep control, what could that mean for markets, and what are the durable policy themes?
I think in this context, the biggest debate far and away is on data center pushback. And this has transitioned from more of a macro thematic, so investors trying to understand the potential implications for the CapEx buildout, to more of a micro, really granular question, right? Which races are the ones that we need to watch? Where are there states or jurisdictions that projects that are pending could be possibly called into question? And that's sort of the continuous debate that I've had recently with investors trying to pinpoint it more precisely to figure out where exactly the buildup could be impacted.

**Michael Zezas** (1:32)
So I hear from investors this general concern that the midterm elections will reveal that it's become a consensus preference amongst American voters and members of both parties to slow down on data center spending or perhaps even stop it or something more severe like that. What type of midterm election outcome would point to that as a possibility?

**Ariana Salvatore** (2:00)
Well, I would start by saying the politics here are scrambled in the sense that there's no clear fault lines when it comes to Democrats or Republicans around data center opposition, right? We are seeing some pretty notable pivots even from lawmakers that in the past were supportive of data centers. So that's why I think we have to zoom into these really specific races. And there I would say there's some governorships that matter actually more than some of the Senate races, because remember, governors also in certain states can appoint public utility commissioners. And in places like Texas, that actually could be a really consequential outcome for the 2026 midterm elections, more so than who ends up sitting in Congress on a very federal level.

**Michael Zezas** (2:40)
Okay. And so would you say it's fair then that folks running for office, who are challenging incumbents in both parties, who are expressing a desire for more regulation on data centers, that it kind of cuts across both parties. So this is more about folks challenging incumbents than it is about one party or the other having a specific view on AI and the AI industrial build out via data center.

**Ariana Salvatore** (3:08)
That's right. It's hard to sort into these really generic party umbrellas. And there are a few nuances under the surface. If you look at something like Ohio, the governor's race there, both the Republican and Democrat candidates are proposing a conditional build out basically. So if certain projects meet criteria, they're going to be allowed to proceed. In other races like in Texas and Pennsylvania governorships, you're seeing the opponents basically propose a more restrictive form of the pause or directive that's already in place. So I would say it's not very clean in terms of Democrat or Republican-led. And that just gives us conviction that this is going to persist and remain an issue even after November, even though the federal policy incentives we don't think are likely going to change.

**Michael Zezas** (3:50)
So we could see investors taking a signal about the AI data center build out from an outcome where incumbents don't do particularly well.
Now I know we're still doing work on this, but what's the current thinking about even if we were to see a result like that? How much should investors be concerned that the expectations around spending on data centers might not be realized because of new policy, other regulatory changes that would come as a result of the midterms?

**Ariana Salvatore** (4:20)
So I would say overall we are still very constructive on AI CapEx, right? So our Internet team is still forecasting over a trillion dollars of spending for the hyperscalers next year. And there are a few reasons for that, one of which has to do with this AI sovereignty theme that we've been writing about. So this notion that governments are increasingly wanting to control their own stack and their own AI capabilities. So that's driving a bit of the spend. On the other hand, we are starting to see mitigation measures from some of these companies to appease some of that local community backlash. And there, we don't see a one size fits all approach. We see very tailored solutions depending on what the source of the pushback is. Just to give a few examples, when you have communities that care about electricity price increases, for example, many hyperscalers have signed on to the Ratepayer Protection Pledge. When you have communities that care about the environmental impact, you've got companies like Google who said they want to put forward a regulatory framework for water usage, Amazon also disclosing their water usage in data centers. And so, like I said, there's not really a uniformity to these responses, but enough that we think will mitigate the concern and still leaves us constructive on the overall build out.