AI policy concerns loom over the equity market, and the US midterm elections are in the countdown
The Zhitong Finance App learned that Wall Street expects that the Democratic Party will win control of at least the first house of Congress in the US midterm elections on Tuesday, which lays the groundwork for possible drastic fluctuations in the stock market and bond market. AI regulation, defense spending, and cryptocurrency legislation will all be put on the table.
UBS's basket of shares linked to the Republican Party has fallen sharply since peaking in August, seriously outperforming the S&P 500 index. One major area likely to have an impact is AI trading, which has driven the stock market over the past few years — the Democratic Party is expected to push for stricter regulation and supervision of this technology. Meanwhile, local governments are under pressure to prevent data centers from being built locally.
Robert Waldner, chief investment officer at Invesco Consulting, said that if the “major political signal” of this election is “data centers are bad, it will have an impact on growth.”
At the same time, other industries may also be targeted. If the Democratic Party pushes to curb defense spending, military contractors may be under pressure. Large banks that make huge profits due to the wave of transactions may face scrutiny. And crypto-related companies may receive congressional attention simply because the industry is closely linked to the Trump family.
All of this has prompted some Wall Street professionals to put pressure on stocks and switch to safer government bonds. Furthermore, many traders seem to be overly locked in their existing positions and expectations that both houses of Congress are evenly matched, and are therefore vulnerable to sharp fluctuations.
Corpay strategist Carl Shamota said, “Investors long and short the dollar for a long time before entering the election, and there is little protection against fluctuations, especially in the stock market. Market consensus anticipates that the Democratic Party's victory by a narrow margin will cause an impasse in Congress and cause the president to advance his goals through executive action, but there are major tail risks.”
A few days before voting day, the following market and stock sectors are worth watching.
US Treasury Bonds
History shows that a congressional impasse favors bonds because it can prevent aggressive policies that widen the deficit and push up long-term US bond yields. However, this time around, bond market observers say that any fiscal relief will be limited and unlikely to lead to a continued rise, because the deficit accounts for about 6% of the total economy, a level that is rare except during recessions.
Oliver Chambers, head of fixed income SMA at Clark Capital Management, said, “We have so much debt that we will have to face one day. But if in the next two years, the impasse means we won't continue to raise our debt at the pace we used to, I think that's a good thing.”
If the Democratic Party's performance is particularly strong, investors may see it as a sign that Americans support AI regulation, thereby depressing technology stocks and weakening economic growth expectations. Under such circumstances, US bond yields may decline.
dollars
Similar to US debt, the dollar may also be boosted by the Democratic Party's victory. The logic is also a stabilizing effect brought about by splitting Congress.
Some investors believe that splitting the government may cause US President Trump to rely heavily on policies that can be promoted unilaterally through executive power. Trump hinted at any escalation with Iran that may occur after the election, which is expected to continue to support the dollar by pushing up energy prices and prompting the Federal Reserve to raise interest rates. The new tariffs could also support the dollar by boosting inflation — unless they trigger a popular global “sell-off America” deal like last year.
Technology and AI infrastructure
Regardless of the midterm election results, Trump will remain president and may veto any legislation deemed bad for the tech industry. This may limit the risk of Nvidia and large AI spending companies such as Alphabet, Meta Platforms, and Microsoft. However, strategists are still preparing for the Democratic Party's performance exceeding expectations to hurt AI trading sentiment.
Ariana Salvatore, head of US public policy research at Morgan Stanley, said, “The key to the midterm elections is not that federal policies immediately limit the risk of data centers, but rather to lay the foundation for relevant legislation that may be introduced in 2029.”
Data center REITs and emerging cloud service companies are vulnerable to computing power tax proposals, according to analysts at Morgan Stanley. On the other hand, off-grid power providers such as Bloom Energy, Cummins, and GE Vernova may be boosted by stricter policies.
health care
Tobin Marcus, head of US policy and politics at Wolfe Research, said hospitals could benefit if the Democratic Party successfully reverses the Medicaid cuts included in last year's tax bill. He said that if the Democratic Party seeks concessions in possible debt ceiling negotiations, it may win in the medical field.
According to Jefferies analysts, hospital stocks such as Acadia Healthcare, HCA Healthcare, and Tenet Healthcare have recent upside in relation to the election. Insurance companies Centene and Oscar Health may also be bought because the market wants the Democratic Party to negotiate to resume enhanced Affordable Care Act subsidies that expired at the end of last year, although the agency believes this outcome is unlikely.
defense
Defense contractors' stock prices lost this year, as the market feared that the Democratic Party's big win could lead to stricter supervision and funding delays. Drone stocks such as AeroVironment and Kratos Defense & Security Solutions had the highest declines. If the Democratic Party controls one or both houses, funding critical to the Pentagon's ambitious drone production program could be at risk.
However, J.P. Morgan believes that if the Republican Party holds its ground, military spending may rise, and names L3Harris, Lockheed Martin, and Northrop Grumman may benefit.
Finance and cryptocurrencies
J.P. Morgan believes that the Republican Party tends to implement looser regulations on the financial industry, so if the party wins unexpectedly, it will benefit lenders such as Bank of America, Citigroup, and Wells Fargo.
However, Barclays analyst Jason Goldberg said that the election is unlikely to change issues such as bank stress tests, because the heads of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Monetary Affairs may remain in office for several more years.
In the cryptocurrency sector, if the Democratic Party controls Congress, the chances of legislation supporting the industry may decline. Democrats and a minority of Republicans blocked the Clarity Act in September, causing stocks such as Coinbase and Circle Internet Group to plummet.
Potential survey targets
Wall Street is preparing for the Democratic Party to launch a series of investigations. Evercore ISI said that AI-focused hearings may cause market risks, and companies such as Nvidia and Amazon have already been investigated and questioned by the Democratic Party. Evercore also anticipates that the Democratic Party will investigate industries related to affordability issues, such as energy, healthcare, food production, and agriculture.
Companies that have received shares from the US government, such as Intel, IBM, and rare earth producer MP Materials, may also face inquiries, putting their stock prices at risk.
Musk's empire
The Democratic Party's victory in one or both houses may have an impact on Tesla and SpaceX, owned by the Republican Party's biggest financier Elon Musk. Investors are expecting the two companies to merge. First New York's Vikram Rye said that although Congress cannot kill the deal alone, an empowered Democratic Party will be able to slow it down.
“If there is a blue wave, both stocks face significant news risk,” he said.