Democrats won commanding majorities in both the House of Representatives and the Senate on Wednesday during the midterm congressional elections, bringing an abrupt change to Washington’s political alignment as stocks surged.
The blue-chip Dow Jones Industrial Average soared more than 1,200 points, or 2.4%, shortly after the opening bell, according to CBS News. The S&P 500 rose 1.7%, and the tech-heavy Nasdaq Composite Index gained 2.1%.
Wall Street initially reacted with panic as early returns rolled in on Tuesday night, driving Nasdaq 100 futures down by as much as 2.5% as reported by NBC News. Sentiment reversed by Wednesday morning as investors digested the election outcome and President Donald Trump indicated he would accept the results.
Trump Accepts Results and Gridlock Anticipated
Freedom Capital Markets chief market strategist Jay Woods noted that the market rebound was in part due to the president’s initial tone and reaction to the results.
Trump told The New York Times he was absolutely willing
to accept the results and told The Wall Street Journal that he and congressional Republicans would work with the opposition. Woods added, Still more uncertainty looms, but one thing is certain, there will be gridlock and historically this is good for the market.
Morgan Stanley Investment Management Andrew Slimmon told CNBC’s Squawk Box Europe that markets like gridlock — they don’t like a party with too much power.
Analysts at the Wells Fargo Investment Institute pointed out that broad investment performance has historically depended more on economic growth, inflation, interest rates, and corporate earnings than on party control, particularly under a divided government. Slimmon also suggested that pushing for a resolution to the Middle East conflict could lower oil prices, noting that crude costs have been an issue for the Fed, and inflation, and part of the reason that rates are higher.
U.S. West Texas Intermediate crude futures dropped 2% on Wednesday to trade around $94 per barrel, CNBC reported.
State Oversight Threatens Artificial Intelligence Infrastructure
LPL Research Jeff Buchbinder noted that data center policy decisions reside at the state and utility-commission level. While the federal policy outlook may see limited changes due to the lack of a filibuster-proof Democratic majority in the Senate and presidential veto power, state-level outcomes pose a direct challenge to the artificial intelligence boom. LPL Research expects the infrastructure buildout to continue, but warned that Democratic gains in key states and local pushback could slow the pace and increase regulatory pressure on power generation, machinery, and semiconductor stocks.
In Texas, a critical hub for artificial intelligence investment, Democratic candidate Gina Hinojosa defeated Republican Gov. Greg Abbott and pledged an immediate moratorium on data center construction, according to CNBC. Evercore’s Sarah Bianchi described the election outcome as a blue tsunami
that will bring new pauses and restrictions on data center development, NBC News reported. Elon Musk’s SpaceX, headquartered in Texas, fell about 5% in early trading alongside shares of CoreWeave.
Data centers in space looking pretty appealing right now
Investors Rotate Funds Across Sectors
Capital Economics Stephen Brown stated in a note to investors that the magnitude of the gains for the Democrats in the midterms does not change too much for the near-term policy outlook, given the party still lacks a filibuster-proof majority in the Senate and President Trump has veto power to block legislation,
adding that more likely, in our view, is a split-government alignment on affordability, energy policy and opportunities from artificial intelligence.
Goldman Sachs economists wrote that Democrats are likely to use fiscal deadlines to limit the war with Iran, roll back selected tariffs, and reverse spending cuts enacted the previous year. Investors rotated funds into sectors positioned to benefit from a more stable legislative environment or a rollback of harsher executive actions. Health insurers and hospital operators advanced, with Molina Healthcare rising 5%, Centene climbing, and HCA Healthcare gaining 7%. The Invesco Solar ETF jumped 8%, CNBC reported.
Earlier coverage: U.S. Midterms, Employment Data, and Japan Earnings to Drive Markets