The US midterms have delivered a stronger Democratic result than markets expected, and artificial intelligence (AI) stocks took the first hit. The instinct to trade the headline is understandable. It is rarely rewarded.
A blue wave and a tech wobble
Although votes are still being counted, the shape of the result is clear. Democrats are projected to have won both the House and the Senate, and to have flipped the governorships of Georgia, Ohio, Iowa and Texas – where a Democrat has not been elected to statewide office since 1994.
Markets moved before the counting was done.
Nasdaq-100 futures initially fell and Asian chip stocks sold off and Japan's Topix dropped more than 3%. However, markets have steadied since.
Texas's governor-elect, Gina Hinojosa, campaigned for an immediate pause on new data centres and an end to their tax breaks. Wells Fargo estimates Texas accounts for 27% of planned US data centre capacity. The AI build-out has been the engine of US earnings growth, and tech dominates both the S&P 500 and global indices. A threat to that build-out is a threat to the market's leadership.
The midterm results landed on a market already on edge. Alphabet fell almost 13% on its results last Thursday, its worst day since listing, erasing close to $500bn of market value. Amazon also fell after missing estimates.
Grit in the gears, not a brake
It is worth being precise about what governors can actually do.
They can slow planning approvals, impose temporary moratoriums, and demand concessions on water, energy and grid infrastructure. That can raise costs and cause delays. It is much harder to stop projects outright. Schemes already under construction typically have permits in hand, and capital can always move to friendlier states.
Campaigning and governing are also very different things. Data centres bring construction jobs, tax revenue and investment, and incoming governors inherit budgets that benefit from all three. Pragmatism tends to follow office.
The constraint is also less partisan than the headlines suggest. Texas's outgoing Republican governor, Greg Abbott, froze data centre permits himself in September pending a review of grid connections. Pressure on power and water is a physical problem, whoever is in charge.
At the federal level, a larger majority arguably gives Democratic leadership more room to pass moderate legislation without leaning on its most radical wing. Anything it passes does still have to survive a presidential veto though.
The macro read-through
A slower build-out would matter well beyond tech.
AI capex has been a meaningful driver of US growth this year, and of demand for power, chips and materials. Less of a rush means somewhat less growth, but also less inflationary pressure.
The first market moves were consistent with that. Treasury yields edged lower overnight and the dollar index slipped around 0.3%. With the 10-year yield still close to 5%, any relief there is welcome. Whether it lasts depends on how much campaign rhetoric becomes policy.
The bigger swing factor remains the Middle East
Oil fell around 7% on Monday on hopes of a US–Iran deal. While still suffering from some disruption, oil shipments are managing to return to near normal levels. However, damage to regional refineries means continued issues in the production of derived products like diesel and petrol, leading to higher prices for everyone.
Trump's tone this morning has been conciliatory, congratulating Democrats on a good night. He has also posted an image of a cap reading "VETO". Markets should not assume the olive branch is permanent.
Valuations across the sector depend on future capacity, with large contractual commitments adding to the stakes. The more useful distinction is reliance on debt: rising borrowing costs, coupled with potential delays, could put greater pressure on businesses that are critically dependent on debt funding. That could give less debt-dependent businesses, particularly the hyperscalers, a relative advantage.
But still, don't trade the headline
Double-digit moves in the world's largest companies within a single session show how hard it is to pick an entry point right now. Winners and losers are changing by the day.
Historically, US equities have tended to rise in the months after a midterm, although a strong run into this one may have pulled some of that forward. Neither pattern is a reason to act on a single night's results.
Meanwhile, diversification is doing its job. The FTSE 100 has held broadly steady at around 10,700 through the past month's tech sell-off, a useful ballast to the S&P 500.
In the meantime, the best response is the familiar one – stay diversified and stay invested. In the long term, time in the markets matters much more than timing the markets.
This article is for information only and not personal financial advice. Investing can help your money grow over the long term, but the value of investments can rise and fall, so you could get back less than you put in. Past performance is not a guide to future returns.
If you’re not sure whether investing is right for you, a financial adviser can help.