Blue Wave Hits AI Stocks: Markets Slide After Democrats’ Midterm Sweep
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Voters have taken Congress away from Donald Trump, and markets are now working out what that means for the AI boom.
According to the Associated Press count, Democrats won a majority in the Senate and took back the House of Representatives in the midterm elections, by a wider margin than polls had suggested. Senate seats in South Carolina, Texas and Ohio flipped to the Democrats, and districts considered safely conservative for a generation changed hands. In Ohio, Republican Jon Husted lost to Sherrod Brown; in Texas, Democrats also won the governor’s race. Post-election analyses attribute the wave to frustration over the cost of living, high gasoline and diesel prices, rising electricity bills and, in several races, opposition to new data centers.
Who Is Selling and Why
The market reaction was reflexive. In Asia, AI and chip stocks led the declines: Samsung, SK Hynix and TSMC fell sharply at times, the Kospi lost as much as 3 percent, Taiwan’s Taiex 2.3 percent and the Nikkei almost 3 percent, while shares of SoftBank, a major OpenAI investor, plunged 8 percent. Nasdaq futures were down more than 2 percent overnight, the dollar fell to a one-month low and the euro rose to 1.125 dollars. European markets opened lower, according to Reuters: after a 1.4 percent drop in overnight futures, DAX and Stoxx 600 futures were still down around 0.2 percent in the morning, with Siemens Energy and Schneider Electric the most exposed AI suppliers. Cryptocurrencies also fell on concerns that crypto legislation launched under Trump could stall in the new Congress.
The reason is less the election itself than what it means for data centers. “Greater regulatory scrutiny of tech and AI companies and a higher likelihood of political gridlock beckon with a Democratic sweep,” said Prashant Newnaha of TD Securities. Texas is a particular worry: alongside Georgia, the state is one of the largest sites for AI data center expansion, and together the two account for roughly a third of such investment. “If Texas imposes a data center moratorium like New York, projects could be delayed further,” said Kim Seok-hwan of Mirae Asset Securities. The fact that a Democrat will now govern there hits chipmakers directly.
On top of that, the AI trade was already wounded before the vote. Goldman Sachs’ basket of broad AI stocks lost 15 percent in October and sits more than 24 percent below its peak, after disappointing earnings, Marvell’s 115 billion dollar deal and growing doubts about when the hyperscalers’ massive investments will pay off. The election gives the market one more reason to rotate out of the theme.
Bonds Win, Stimulus Loses
The winners sit on the other side of the ledger. US Treasuries rallied, with the 10-year yield falling six basis points to 4.91 percent after topping 5.3 percent the day before, a 24-year high. The yen and Swiss franc, the classic safe havens, each gained almost one percent. The logic: a divided Congress curbs new tax cuts and spending programs, a 5,000 dollar direct payment to all adults floated during the campaign is off the table, and if AI regulation dampens growth, pressure on the Federal Reserve to raise rates eases too. “Bonds emerge as the clear winner while markets take the AI trade to the woodshed,” Newnaha said.
Why the Selloff Faded by Morning
How far regulation will actually go is an open question, and that is exactly what slowed the selloff overnight. Trump has vowed to act as “Mr. Veto” and block Democratic legislation, and he retains control over trade policy, foreign policy and large parts of regulation by executive order. An AI law that passes both chambers and survives the White House is unlikely in the next two years; investigations, debt ceiling fights and gridlock are more probable. “Looks like investors are buying the dip after the initial knee-jerk selloff,” said Charu Chanana of Saxo. “Political gridlock does not necessarily mean weaker corporate earnings.” Nasdaq futures trimmed their losses to 0.5 percent by morning, and the Kospi even turned positive. George Efstathopoulos of Fidelity International sees the midterms as a “clearing event” and considers it a good moment to gradually re-enter tech, arguing that fundamentals and prices have diverged. Michael Arone of State Street puts it more sharply: the bigger risk is not the election result but investors overreacting to it.
For Europe, the picture is mixed. A weaker dollar weighs on exporters, while a restrained US fiscal path eases pressure on rates on this side of the Atlantic too; the Bund yield stood at 3.35 percent in the morning. And if the US really does slow its data center buildout, some of that demand is likely to migrate to wherever power and permits are available. Whether that is Europe will not be decided in Washington.
