AI stocks fell on Wednesday after what Reuters called stunning victories for Democrats. The party took the Senate and the House in Tuesday's midterms, Reuters reported, in a copy syndicated on Yahoo Finance. CBS News projected the same result but gave no final Senate tally, saying only that the size of the majority "remains to be seen". We treat all seat counts as unconfirmed.
At 08:11 BST, Reuters had S&P 500 futures down 0.35%. Nasdaq futures had skidded more than 2% before recovering to a 0.5% loss, and European futures were 0.4% lower. The dollar index fell 0.37% to 101.34. Reuters tied the sell-off to fears that AI growth "could be hamstrung by regulatory scrutiny". Mirae Asset's Kim Seok-hwan said a Democratic win in Texas, a fast-growing computing market, could weigh on chip stocks. If Texas followed New York in declaring a moratorium on data centres, he said, projects could face further delays.
Yesterday we argued that gridlock suits markets. We leaned on MUFG Research, which called a Democratic House and a narrow Republican Senate the "most market friendly outcome", one that would "limit policy changes (i.e., gridlock) while preserving AI investment". That outcome did not arrive. The test is therefore partial, and the result is mixed.
Bonds behaved as the argument predicts. Reuters said Treasuries rallied, with the 10-year yield down 6 basis points to 4.906%, because investors expect gridlock to cut government spending. Saxo's Charu Chanana said investors may be recognising that "political gridlock doesn't necessarily mean weaker corporate earnings." Equities behaved differently. The brake we described in Federalist No. 51 ("Ambition must be made to counteract ambition") works on federal legislation, and Donald Trump is still in the White House. Goldman Sachs strategists, quoted by CNBC before the vote, thought a national data-centre moratorium unlikely under any result, though a Democratic Congress might curb data-centre tax incentives. Our reading is that the market is pricing something else, namely hearings, subpoenas and state governments, none of which need the president's signature.
So our claim was too broad. Gridlock is good news for the bond market and for anyone who fears new laws. It is weaker comfort to a sector whose risks sit in oversight and in the states.
The sceptical reading deserves a hearing. The Nasdaq had its worst day since June on 29 October, before anyone voted, amid turbulence in AI stocks. Fidelity International's George Efstathopoulos called the midterms "a clearing event" for a sector where fundamentals and pricing had diverged. On that view the election supplied a reason for a fall that valuations had already invited. The Nasdaq's partial recovery from its worst moment fits that story. It does not prove it.
Watch for: whether Texas moves toward a data-centre moratorium, and the final Senate count.
Cover image: Sign of the New York Stock Exchange, Broad Street, Billie Grace Ward / Wikimedia Commons, CC0 1.0. File photograph.
