What Investing Pros See Ahead For Markets After The Democrats Win Congress

• Markets are moving on the Democrats' sweep in the midterm elections.
• The election has implications for the Iran war, the AI buildout, centers, and fiscal issues looming over investors.
• Goldman wrote that Democratic wins will have "significant implications" for the AI trade.

The seismic shift in the political landscape after Tuesday's midterms is still being assessed, but investing pros are starting to get a handle on what it might mean for markets.

The Democrats' sweep puts them back in control of both the Senate and House. While that's a momentous political development, given the now-divided government, it's also a recipe for gridlock. That tends to be a positive scenario for markets, which are often anxious about the prospect of sweeping change to things like policy or regulation.

Data center fight takes center stage

The AI trade is a possible wrinkle in the outlook, though, particularly the data center buildout.

"On AI and data center regulation, Democratic wins at the state and local level are likely to have significant implications," wrote Goldman Sachs chief economist Jan Hatzius on Wednesday. "The states where Democrats are likely to further restrict data centers account for roughly 45% of planned US data center capacity, with Texas alone accounting for roughly 25%."

Morgan Stanley previously highlighted several states with data center projects that could be compromised by a political flip, almost all of which were won by democrats on Tuesday.

Texas flipped a Senate seat and a governorship blue on Tuesday, as well as a handful of other state positions and four state supreme court seats. Governor-elect Gina Hinojosa has been a more staunch opponent of data centers than Greg Abbott, whose moratorium on development was expected to soften after the election in the event that he won.

"State and local rules remain more important for data center timing and location," wrote Ulrike Hoffmann-Burchardi, CIO of UBS Americas. "The composition of state governments, including the result in Texas, may prove more consequential for individual data center projects than the change in congressional control."

Dan Ives of Yorkville Ives, a tech and AI mega-bull addressed the midterms in a note to investors, saying that it will likely pose considerable hurdles for the AI expansion over the next two years.

"The biggest worry of the night for tech investors and the AI trade was around the state of Texas where ~25%-30% of data center gigawatts and capacity will come from…with Democrat Gina Hinojosa winning the Texas Governor race in a surprise over incumbent Greg Abbott," Ives wrote.

A shifting fiscal outlook

George Saravelos, global head of FX Research at Deutsche Bank, said that the debt ceiling is now a major item on the agenda heading into next year, noting that the Republicans could raise the debt limit via reconciliation in the coming weeks.

"If this succeeds, it will remove one additional layer of uncertainty on fiscal policy, while also preventing AI and other policy matters from getting bundled up in a protracted negotiation with a Democratic Congress," he said.

With Democrats' victory has also come recalibrated expectations for the US fiscal situation. If Democrats curtail Trump's ability to go to war when they take power, the outlook for the deficit could improve. Trump's statement ahead of the vote indicating he had no plans to resume strikes on Iran also sent oil prices tumbling, pushing bond yields down as investors adjusted expectations for inflation and interest rates.

Other finance pros urged investors not to panic about the election's knock-on effects on things like AI. Mark Malek, CIO of Siebert Financial said that although the market impacts of the blue wave are real, the AI-led bull market won't be derailed.

He added that although data center costs could rise, the cost of AI buildout hasn't stopped Big Tech hyperscalers, who are still committed to spending huge sums on more infrastructure in 2027 and beyond.

"Every tax break that disappears and every megawatt a builder has to generate for itself comes straight out of the return on that capital," he stated. "For investors, that is not a reason to run from the AI trade. It is a reason to read the margin line a little more carefully when the next round of earnings comes in."