Morgan Stanley: 2026 Policy Catalysts, AI Capex, and Market Reactions

Policy Landscape for 2026

• 🎯 The year 2026 is expected to be less about new major policy choices and more about how economic actors react to existing policies.
• 🔑 Key policy decisions already made include significantly higher tariffs and tax incentives from the 'one big beautiful bill act'.
• ⚠️ Potential risks in 2026 include the midterm elections and important Supreme Court cases.

Supreme Court and Fed Independence

• ⚖️ A Supreme Court decision on tariff authority is anticipated, with the White House expected to find alternative means to maintain them if authority is removed.
• 🏦 Supreme Court cases weighing in on Fed independence are seen as particularly important for fixed income markets.
• 🏛️ Changes in congressional power during the midterms are unlikely to alter policies executed through executive authority, such as tariffs and regulations.

AI Capex and Economic Growth

• 🚀 The AI capex story is a significant driver of projected positive growth in 2026, accounting for 20-25% of that growth.
• 📈 Tax policy incentives are enabling this AI capex, which is expected to positively impact corporate earnings and equity markets.
• 💰 Over the next few years, approximately $3 trillion in AI capex is anticipated, with about half financed by debt.

State vs. Federal AI Regulation

• 🌐 A tension exists between federal AI regulatory ambitions and state/local government actions, particularly concerning data center moratoriums.
• 🏗️ Federal control over building regulations is expected to be difficult due to existing state and local rules.
• 🔒 While the federal government may have more agency in areas like information privacy, state and local actions could potentially slow, but not stall, AI-related spending.