MARKETS
Further disruption to Middle Eastern oil supplies pushed Brent crude above US$110 a barrel, raising concerns about higher inflation and interest rates remaining elevated for longer. Investors have also become more cautious about the enormous spending by major technology companies on AI infrastructure and whether the investment will generate sufficient returns. This contributed to volatility in US technology stocks, particularly following mixed earnings announcements from the likes of Microsoft, Alphabet/Google and Amazon. The Federal Reserve left interest rates on hold while the US economy expanded in the third quarter at the fastest pace in a year.
In Australia, higher fuel prices contributed to a stronger-than-expected inflation result for the September quarter, increasing market expectations of another 0.25% interest rate rise at the Reserve Bank's November meeting. Major banks have performed relatively well but miners have been affected by concerns around commodity demand and production. Trading updates from major retailers highlighted weaker-than-expected sales, with JB Hi-Fi (JBH) reporting a 0.4% decline for the September quarter, while Wesfarmers (WES) also warned that sales growth at Bunnings had moderated.
WHAT THE US MIDTERM ELECTIONS COULD CHANGE
Next week’s midterms could change the makeup and control of Congress, particularly with affordability as a key issue for voters and backdrop for the election. Yet the results won’t necessarily lead to a major shift in the broader policy direction from Washington, according to Morgan Stanley. Much of the Trump administration’s agenda can continue without meaningful new legislation or action from Congress. For investors and companies, the areas that deserve closer attention are market considerations connected to fiscal policy and how AI and the data centre buildout will proceed with the increased likelihood of conditions from state and local governments.
Changing control of Congress may not mean a major change in policy
Even if the Democrats gain control of House of Representatives, or both the House and Senate, a divided government would make it difficult to pass large, partisan legislation. One important reason is that reconciliation - the principal vehicle used to advance large-scale fiscal legislation with a simple Senate majority - wouldn’t be feasible if control of Congress changes or is split. The president can also veto legislation even with Democratic majorities in both the House and Senate.
Much of the Trump administration’s current agenda on deregulation, tariffs and trade policy, immigration and geopolitics is being implemented through the executive branch and federal agencies. Even if congressional control changes as a result of the midterms, these policy trajectories would continue. What could change with a divided government is that congressional oversight could become more aggressive, particularly towards the president, and agencies could take on a greater role in policymaking.
The trajectory of fiscal policy will likely remain unchanged
Although fiscal policy is more sensitive to the outcome of the midterms, they’re unlikely to result in a broader shift, particularly since neither party has much incentive to enact significant fiscal change through spending cuts or tax increases. Legislatively, without reconciliation large-scale fiscal support would become more difficult to pass Congress, and negotiations over government funding, the debt ceiling and defence spending will likely come into focus and become more contentious and uncertain under a divided government. More noise around government funding and the debt ceiling - with US debt rising past US$40 trillion for the first time in August - is more likely than actual change.
Likewise, from a markets perspective, key recent market drivers such as tariffs, tax policy and deregulation would remain broadly in place, even with a shift in Congress. Tariffs are an established factor for markets, tax policy has largely been set, and much of the administration’s deregulatory infrastructure, primarily implemented by appointed officials, is already in position. Since January 2025, instances of elevated policy uncertainty and associated market volatility were tied to executive, rather than legislative, action. Strong US nominal growth has been supported by fiscal policy and deficit-financed stimulus.
Average S&P 500 performance was strongest in the year following midterm elections with a Republican president and a split Congress, at 23%. With a Republican presidency and a Democratic Congress, average performance in the year after midterms was 15%.
The AI buildout will likely continue, but with more conditions
The current bipartisan political issue of AI and data centres underscores how the most notable policy developments following the midterms may come from state and local governments, and not from Congress. At the state and local levels, however, the debate around data centres is focused on moratoriums, energy costs and community concerns. New executive orders, frameworks and audits from governors in New York, Virginia and Texas underline that this dynamic of data centre development with conditions is evident across red and blue states.
The election can have meaningful consequences, but on a highly localized basis, supporting the base case for a conditional buildout with respect to data centres. This would preserve the expected levels of capital expenditure but only in certain regions contingent upon community engagement or other mitigation measures. A conditional buildout is still substantial - Morgan Stanley forecasts US$1.5 trillion of hyperscaler capex in 2027.
In the future, a potential middle ground could emerge in which data centre developers are asked to absorb energy costs, help fund new infrastructure, accept different tax and utility arrangements or address specific community concerns. As a result, agreements between state governments and data centre operators could have implications for utilities, infrastructure, transportation and other sectors that stand to benefit from AI investment.
At the national level, budding arguments for the continued AI buildout focus on national security concerns and strategic competition with China, and that restrictions on data centres could undermine US competitiveness in the longer term, particularly in light of looming power and compute constraints. Morgan Stanley recently forecast that US data centre developers will face a power shortfall of more than 30% through 2028.
Meanwhile, federal legislation on AI is likely to move more slowly, and a national pause is unlikely. State and local governments will remain more influential in decision-making that can directly affect AI projects.
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