Wall Street rallies hard as midterm uncertainty removed

Democrat Gina Hinojosa won the Texas governor race. Photo: Chip Somodevilla/Getty Images.

Wall Street jitters over how Democrat control of Congress will impact the AI trade today failed to knock Microsoft Corp (NASDAQ:MSFT), Alphabet Inc Class A (NASDAQ:GOOGL) and Meta Platforms Inc Class A (NASDAQ:META) as the S&P 500 index opened sharply higher.

The Dow Jones Industrial Average and the Nasdaq also started the day up by more than 2%, even though futures trading initially pointed to a weak performance after it emerged that the Democrats had won both the House of Representatives and Senate.

• Invest with ii: Buy US Stocks from UK | Most-traded US Stocks | Cashback Offers

The gains came despite fears that the result of the midterm elections could spell the end for the AI boom if a Democrat-led Congress increases regulatory scrutiny of the buildout.

The highest profile casualties of the session were Space Exploration Technologies Corp Class A (NASDAQ:SPCX) and Tesla Inc (NASDAQ:TSLA) as the home state of Elon Musk’s business empire experienced a blue wave.

The potential blow to his expansion and SpaceX-Tesla merger plans followed defeats for the Republican candidates at Texas senator and governor level.

The shares of AI cloud infrastructure companies CoreWeave Inc Ordinary Shares - Class A (NASDAQ:CRWV) and Nebius Group NV Shs Class-A- (NASDAQ:NBIS) also suffered as the state, which is home to multiple data centre facilities, fell to Democrat governor Gina Hinojosa.

Morgan Stanley said: “Governor Hinojosa’s campaign platform included a moratorium on new data centre approvals, and given the Texas governor’s multiple regulatory agencies that are involved in approving new data centre projects, we see the risk of many projects being delayed significantly.”

The overhaul of Congress has come at an awkward moment for the AI trade, given that concerns around valuations, levels of capital expenditure and returns on investment recently led to the technical correction of the tech-focused Nasdaq.

• How UK shares reacted to US midterm election result
• US midterm elections: one of best historical buy signals for equities
• Best AI stocks amid market exuberance, and portfolio defenders

Saxo Bank said: “The congressional scrutiny could accelerate demands for AI safety standards, independent model evaluations and greater accountability for data centre developers.

“However, this is not the same as an outright anti-AI policy agenda. AI is strategically important for US competitiveness, particularly against China, and there remains considerable bipartisan interest in maintaining American leadership.”

One factor in Wall Street’s resilient performance was today’s decline in 10-year US Treasury yield as traders speculated that further tax cuts or major spending packages will become harder to pass.

As we reported yesterday, the S&P 500 index has been higher one year after all midterm votes since the Second World War.

Deutsche Bank said today: “Ahead of almost every US election, the worries tend to look more concerning than they do immediately afterwards. So far, this one is following the same script.

“AI and Iran may yet test that calm in the weeks and months ahead, but the S&P 500 has been higher one year after each of the last 22 midterms.

“History is never a guarantee, and AI will hold the key to whether we’ll see the run extend to 23, but the striking message from both the election result and the market record is the same: political uncertainty usually peaks before the vote, not after it.”

• The investment trusts tapping the next wave of IPOs
• Polar Capital Technology: the AI stocks I’m excited about in cognitive era
• Stockwatch: buy Alphabet’s crash or chase Microsoft’s momentum?

UBS Global Wealth Management added that it expects the changes in Congress will result in “sand in the legislative gears, not sharp policy changes”.

The bank told clients: “Control of Congress will give Democrats greater oversight of the Trump administration, the authority to confirm or reject presidential appointments and nominations, and greater influence over spending and debt-limit negotiations.

“It will also give Democrats a platform to test policy proposals on areas including Social Security, healthcare, and AI regulation ahead of 2028.”

UBS said greater congressional oversight will not necessarily derail the AI investment cycle, adding that state and local rules remain more important for data-centre timing and location.

“The composition of state governments, including the result in Texas, may prove more consequential for individual data centre projects than the change in congressional control.”

Capital Economics pointed out that the magnitude of the gains for the Democrats should not have a major bearing on the near-term policy outlook, given the party still lacked a filibuster-proof majority in the Senate and President Donald Trump has veto power to block legislation.

• 10 of the biggest IPOs on Wall Street in 2026
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• Where four experts are investing towards end of 2026

But the Democrats will now hold Senate seats in many typically red states for the next six years, which increases their chance of being able to enact more sweeping legislative changes if they win the next presidential election.

“That includes the potential for tax hikes on corporations and high-income individuals as well as regulation that could delay the AI rollout.

“While we are already seeing plenty of regulatory pushback at the state and local government level which may delay the data centre build-out, federal regulation arguably presents a bigger risk to the AI trade because it could delay the speed of AI adoption too.

“Accordingly, the midterm results further heighten the chance that we may already have seen the peak for AI-related equities and it could potentially delay the boost to productivity that we have incorporated into our forecasts for later this decade.”